Federal budget to delay rate cut, says HSBC

The Reserve Bank of Australia (RBA) is expected to keep interest rates on hold tomorrow, with the government's decision to deliver its federal budget early likely to deter the RBA from cutting until mid-2016, says HSBC.

HSBC chief economist Australia and New Zealand, Paul Bloxham, said the RBA is expected to keep rates on hold at two per cent tomorrow, and is unlikely to cut in May, June or July.

Mr Bloxham said the Turnbull government’s decision to move the federal budget forward to 3 May could delay the RBA cutting rates.

“The central bank is unlikely to consider cutting while the government is delivering its budget.”

If Prime Minister Malcolm Turnbull calls an early election on 2 July, this could reduce the likelihood of further rate cuts in June or July.

“In short, irrespective of the economic numbers, a Q2 cut is looking less likely than previously for tactical reasons associated with politics,” Mr Bloxham said.

“Saying this, a weak enough set of economic indicators would mean the RBA would cut anyway, despite the possible political implications.”

HSBC now expects a rate cut in mid-2016.

Griffith University finance professor Mark Brimble weighed in on the matter, saying the RBA is likely to opt for August to cut the official cash rate.

“The majority of indicators are weakening. The Reserve Bank has room to move on rates and the economy needs the support, both the actual and the psychological,” Mr Brimble said.

Bank of Sydney deputy chief executive Steven Pambris also forecast an August rate cut, while AMP Capital chief economist Shane Oliver said a May cut is most likely.