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Economists split on central bank rates decisi -

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Reporter: Peter Ryan

PETER CAVE: Tomorrow's meeting of the Reserve Bank board has economists divided on whether official
interest rates will be cut again or left on hold.

Even the economists who are betting on a reduction admit it will be a close call as the central
bank weighs up its recent dramatic cuts with a sinking world economy.

Some of those calling for a rate cut think it should be a hefty one to ensure that banks pass at
least some of the reduction on to borrowers.

Here's our business editor Peter Ryan.

PETER RYAN: Economists have rarely been so divided about the central bank's thinking.

In a poll of 21 soothsayers conducted by the Reuters newsagency, 13 think the Reserve Bank will
keep the cash rate on hold for the second consecutive month at 3.25 per cent.

The rest expect an easing of between a quarter and half a percentage point.

The Macquarie Group's interest rates strategist Rory Robertson is in the latter group - but even he
thinks it will be toss-up.

RORY ROBERTSON: I think it's an extremely close call and as outsiders we're just guessing, but I
think the Reserve Bank is going to cut by half a percentage point tomorrow.

PETER RYAN: Rory Robertson says the Reserve Bank could be about to reverse its advocated strategy
of staying on the sidelines given the wide acknowledgment, though still technically unofficial,
that Australian is in recession.

RORY ROBERTSON: The main things that's happened since then is that the economic downturn the
Reserve Bank forecast in February has morphed into a recession that the Reserve Bank didn't
forecast.

So this issue would be is the Reserve Bank going to respond to the significant downside surprise in
the economy since it began its pause.

PETER RYAN: And you believe that will be 50 basis points?

RORY ROBERTSON: Well I'm guessing. I think you know it's either nothing done, a quarter point or a
half a point. And I think a half a point cut is the most likely scenario.

PETER RYAN: The chief economist at St George Bank Besa Deda is also in the rate cut camp - but only
just, tipping a less dramatic reduction.

BESA DEDA: Well I think it will be a very close call tomorrow; but we wouldn't be ruling out a rate
cut. So, we're pricing in a rate cut of 25 basis points tomorrow.

PETER RYAN: Besa Deda admits that with the cash rate now at a 45-year low, the Reserve Bank could
just as easily hold fire this time around, given optimistic economic signs.

BESA DEDA: They may want to give it a little bit more time to assess what the impact of the
stimulus to date has had on the economy. So therefore have a little bit more time to examine the
data.

And the second one is that the RBA will need to weigh the trends in the economy against those ones
in the financial markets.

PETER RYAN: Some economists believe the Reserve Bank is also weighing up the attitude and
willingness of banks to pass on future rate cuts to borrowers.

JP Morgan economists Helen Kevans believes if the RBA cuts deeper tomorrow, it will be to ensure
borrowers receive at least some relief.

HELEN KEVANS: We think that the RBA will lean towards a 50 basis point cut. One reason is though
that locally the RBA will be looking to get more bang for its buck.

And by that I mean that by delivering a 50 basis point cut we're more likely to see the local banks
pass on some of those rate cuts. And we might see a fall in borrowing costs as well.

PETER RYAN: Do you think that if there is a cut of just 25 basis points that some banks might hold
some, or all of that back?

HELEN KEVANS: We have heard a lot of rumours that banks will be passing on no future cuts to the
official cash rate. But we do think if a 50 basis point cut is delivered then we may see some past
through of that.

If a 25 basis point is delivered I would suspect that the banks probably won't tend to cut rates at
all.

PETER RYAN: Some economists predicting no movement tomorrow are strident in their views.

In addition to forecasting a pause, Westpac believes the Reserve Bank will continue to assess local
and global indicators until August, which could see the start of a new cutting cycle where rates
could fall to a low of two per cent.

PETER CAVE: Our business editor Peter Ryan.