The Reserve Bank is expected to cut the cash rate on Tuesday, easing pressure on indebted households grappling with high living costs and elevated mortgage repayments.
Market pricing implies a 95% chance the level will fall by a quarter point to 3.85%, amid growing confidence that inflation is being tamed.
There were, however, competing views from economists that suggested the RBA could offer a surprise bumper half percentage point cut, or no cut at all, making the decision one of the most anticipated in recent times.
The chief economist at Betashares, David Bassanese, said he believed inflation had eased enough to trigger a rate reduction.
“The reason they are cutting rates is not due to weakness in the economy; they’re cutting rates because of well-behaved inflation,” Bassanese said.
“It’s taking the foot off the brake rather than putting the foot on the accelerator.”
A reduction from the cash rate’s current elevated level of 4.1% would be viewed as a shift back towards neutral, rather than an attempt by the RBA to stimulate the economy, which currently has a soaring stock market and strong jobs market.
While there is no formal definition of what the RBA deems a neutral rate, it is broadly interpreted at around the 3.35% to 3.6% level.
A reduction on Tuesday, which would be the second rate cut this year, would swiftly flow through to lending rates, saving mortgaged households $114 a week for a $750,000 loan, according to Canstar.
A cut would be likely to drive homebuyer activity, lifting property prices, although affordability constraints are expected to prevent the market from booming again in the near future.
Pradeep Philip, partner at Deloitte Access Economics, said a rate cut would help businesses after Donald Trump’s tariff regime dissuaded many companies in Australia from investing in new equipment and technology.
“It’ll be a big signal around business investment, and it effectively would be a bit of insurance being taken out against global instability,” Philip said.
The initial shock of Trump’s “liberation day” tariffs convinced some forecasters to tip a bumper half percentage point cut in May amid fears the global economy would fall into recession and create a need to stimulate economic activity in Australia.
That view lost favour in recent weeks due to moves by Trump to wind the tariffs back and mend economic relations with China. Global share markets, including in Australia, had also recovered, fuelling investor confidence and lessening the need for a local stimulus.
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A strong jobs market and rising wages in Australia also caused some economists to pare their rate cut expectations.
ANZ expected a quarter point cut on Tuesday was “more likely than not”, while noting there was a chance of the RBA surprising the market by holding rates steady.
In the hold scenario, everything from equity prices to the value of the Australian dollar would need to adjust, which would lead to volatile market movements after the announcement on Tuesday afternoon.
The RBA has consistently pushed back against predictions it would deliver a string of rate cuts as it tries to wind inflation back further.
The chief economist at the Centre for Independent Studies, Peter Tulip, said the current rate settings were keeping a lid on inflation.
“The RBA argued [in February] a sizeable reduction in rates, as the market then and now is expecting, would lead to inflation above the target,” Tulip said in comments published by the Australian National University.
“Incoming data releases do not indicate any reason to revise that conclusion.”
