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RBA rate cut this week a very close call

Megan Neil
Economists speculating the Reserve Bank is on the verge of cutting interest rates to a new low

An interest rate cut this week by the Reserve Bank of Australia will be a very close call.

Economists expect the central bank will cut the cash rate to a new record low soon, but are divided about whether it will be as soon as Tuesday's board meeting.

It is shaping up to be the most finely balanced policy get together in years, CommSec senior economist Ryan Felsman said.

"The annual rate of 'underlying' inflation - the bank's preferred measure of prices - was the lowest on record at 1.4 per cent in the March quarter, leaving the door ajar for a possible rate cut," Mr Felsman said.

"But we think that the board will want to see a 'sustained increase in the unemployment rate' before it pulls the trigger."

Economists at ANZ and AMP Capital are among those predicting the cash rate will be cut by 25 basis points to 1.25 per cent on Tuesday, after the weak inflation data.

AMP Capital chief economist Shane Oliver expects the RBA will make its first rate move since August 2016 this week.

"However, while we remain confident that rates will be cut to 1.0 per cent by year end, it's a very close call as to whether the bank goes Tuesday or waits till after the election," Dr Oliver said.

ANZ economists do not believe the timing of the May 18 federal election will be a constraint on RBA action, noting the central bank cut the cash rate in 2013 and raised it in 2007 during election campaigns.

"For the RBA to do nothing would open it up to as much criticism of acting with one eye on politics as a decision to ease," ANZ's head of Australian economics David Plank said.

Westpac chief economist Bill Evans said the precedents in previous elections were not relevant, although the RBA will be apolitical in its decision process.

"A decision to begin a new rate cut cycle 10 days out from a federal election will be difficult," he said.

Mr Evans said the case for a rate cut has strengthened, but Westpac believed the RBA will adopt a clear easing bias at its May meeting before delivering two 25 basis point rate cuts in August and November.

"We think that a move next week will be a little early for the RBA," Mr Evans said.

NAB economists also expect the RBA will keep rates on hold this month but instead adopt a clear easing bias when it releases its statement on monetary policy on Friday.

Economist Kaixin Owyong said the statement will be particularly important as the market gauges the potential low in interest rates, which NAB currently forecast to be 1.0 per cent by late this year.

She said NAB expects downgrades to the RBA's growth and inflation forecasts in the statement, with relatively less change to the outlook for unemployment.

Wall street closed up on Friday with a broad-based rally after stronger than expected job growth, suggesting the Australian stockmarket will start the week higher on Monday.