RBA interest rates: Borrowers tipped to win interest rate relief despite trade tensions easing and strong jobs

The Reserve Bank is widely tipped to cut interest rates on Tuesday despite an easing of trade war tensions and strong jobs growth. Markets believe the chances the RBA will lower interest rates for the second time this year are greater than nine-in-ten. That would reduce the official interest rate 0.25 percentage points to 3.85 per cent. The optimism follows a three-year battle by the central bank to bring cost of living pressure under control, and amid an international trade storm on the horizon. Inflation has fallen back into the RBA’s target zone and the bank’s preferred measure — which removes volatility — was down to 2.9 per cent in the year to March. But analysts warn borrowers should be wary of the risk that inflation bounces back. Judo Bank chief economic advisor Warren Hogan expects a rate cut, even though last week’s economic data and trade news “suggested there are no signs of urgency for the RBA to cut rates”. “Inflationary risks remain in the economy,” Mr Hogan said. He said the RBA would likely lower interest rates in response to weak retail sales and easing wage pressure. The Reserve will also need to balance the white-hot labour market against international trade tensions. Unemployment remains low at 4.1 per cent and a remarkable 89,000 jobs were created in April, suggesting there’s little need to stimulate activity. On the other side of the ledger, the six weeks since the RBA last met brought an extraordinary economic roller-coaster driven by US President Donald Trump. Mr Trump announced a huge series of new trade taxes just hours after the RBA’s April 1 meeting. Financial markets were sent into a tailspin by the policy and interest costs for US Government debt surged. The tariffs have since been dialled back and his government agreed a 90-day cool-down with China last week, lowering economic risk. The chaos will still be a factor for the RBA’s policy committee — which commenced a two-day meeting on Monday — as the uncertainty will have put a damper on confidence and investment. HSBC chief economist Paul Bloxham said the RBA’s decision would have been a close call, judging by the unemployment and inflation figures. But international factors would push the RBA over the line. “The global economy has faced a substantial trade policy shock which has sharply increased economic uncertainty,” he said. “(That) is set to weaken global growth and . . . the likely risk for Australia is more disinflation.” That would mean inflation falls further, widening the scope for interest rates to fall. “Local growth indicators, particularly of consumer spending, suggest the modest growth upswing that has been underway could be stalling, or is at least weaker than the RBA had been forecasting,” he said. Commonwealth Bank’s Gareth Aird also remained confident borrowers would receive some relief. “We are confident that the RBA will cut the cash rate by 25 basis points,” he said. “US trade policy has been erratic, and this has led to significant uncertainty around the global economic outlook. “The trade situation between the US and China is now better than what we were potentially facing . . . but this is still not a good situation for global growth.” But while markets were confident borrowers would get a boost, Acting Prime Minister Richard Marles would not be drawn on Monday. “I’m not going to speculate about a rate decision,” he said. “That’s obviously a matter for the Reserve Bank.”