RBA tipped to hold 2.5pc cash rate

RBA Governor Glenn Stevens.
RBA Governor Glenn Stevens.

The Reserve Bank of Australia is likely to keep the cash rate on hold this week as it awaits the outcome of the federal election and allows the August rate cut to work.

All 14 economists surveyed by AAP expect the RBA to keep the cash rate on hold at the record low of 2.5 per cent tomorrow.

HSBC chief economist Paul Bloxham said the RBA's next move would be reliant on the Australian dollar, with the central bank more comfortable with a currency closer to US85c.

The RBA would also be waiting to see what happens to business confidence after the federal election, with governor Glenn Stevens having expressed concerns about weaker sentiment, he said.

"Governor Stevens has noted that it was this lack of confidence that is the key reason why the rotation, or rebalancing, of growth has been slower than expected," Bloxham said.

"The last speech drew a direct link between weak business confidence and the lack of clarity about the policy framework and objectives - a direct criticism of the state of politics in Australia," he said.

"The election will hopefully deliver some more certainty about the policy framework and objectives, whichever side wins."

Capital expenditure figures released by the Australian Bureau of Statistics on Thursday showed investment intentions outside of the resources sector remained weak, Bloxham added.

National Australia Bank senior economist David de Garis said there was room for another rate cut before the end of 2013 - even if the Aussie dollar falls further - with unemployment forecast to push through 6 per cent.

"The RBA have made it pretty clear that even with the Aussie dollar going down, they still expect inflation to be within their target bands and so there's not going to be a barrier to another cut," de Garis said.

He said the rebalancing of the economy would take time, with consumers using the record low interest rates to pay off debts instead of splashing their cash.

"Both businesses and consumers are showing signs of being quite cautious with their finances, using a lower rate to repay debt faster, so that's weighing on discretionary spending," de Garis said.

"In time, the lower rates weigh down on deposit rates and so forth and it does make alternative investments begin to look more attractive, so you start to see more money flow to other areas."

- AAP

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