At 2:30pm today, a Reserve Bank web monkey will upload a statement onto the central bank’s website announcing the board’s decision on interest rates. Crikey punters with a nervous tick can head here from 2:28pm and start hammering the refresh key, with major business news outlets likely to follow within seconds, having already pre-written stories to account for almost any possibility emanating from Governor Glenn Stevens’ brain. Reserve Bank insiders are said to be amused at the online outlets’ simultaneous turnaround time with breaking news reports emailed internally as a kind of running joke.

Economists are predictably “divided” on whether Stevens and co will cut rates from the current 45-year low of 3.25% and if so whether the reduction will be a quarter or half a percentage point. But in the grand tradition of pointy-headed soothsaying, no-one really seems to have any real idea what will transpire — a Reuters survey claims 13 of 24 economists reckon the RBA will hold at 3.25% for the second consecutive month, while 14 of 23 economists surveyed by Bloomberg News apparently think the same.

Interestingly, credence is increasingly being given to journalists with a “line in” to the Reserve Bank like Terry McCrann and Alan Mitchell. Both scribes claimed a 0.5% cut is likely in recent articles. Meanwhile, “investors” have a factored in a “100% chance” that the RBA will cut by a quarter point. Go figure.

A further level of intrigue will be provided by the nation’s major lenders, with no guarantee that the Big Four will make any immediate adjustment to their headline rates. Wayne Swan issued an early warning to the banks last night and if one decides to pull the trigger early it’s likely others will follow suit via announcements to the ASX.

Here at Crikey we’re not immune from speculation but have instead compiled the best private research emanating from the nation’s investment banks. Check back on the website from about 3:00pm for a measured dissection of the RBA’s decision courtesy of Glenn Dyer.

UBS: We and the consensus of economists think the RBA will leave rates on-hold compared to market pricing for a 25bp cut, though it is a close call.

The RBA has already cut rates aggressively by 400bp to 3.25%, and we expect another 125bp to a record low 2% by Q3 2009. Together with the more than 5% of GDP fiscal stimulus, and the large fall in the currency, significant policy stimulus should support demand in the year ahead

Goldman Sachs JBWere: While the RBA has acknowledged further downgrades to its GDP forecast subsequent to the last meeting, we do not believe this will be enough to prompt a rate cut in April. Given the lags involved in implementation of monetary policy; the size of the fiscal stimulus; the rekindling of some modest risk taking behaviour and signs of stabilisation in global data flow, we believe it is likely the RBA will leave rates on hold in April. We continue to expect 50bp of cuts in 2H2009 taking the cash rate to a trough of 2.75%.

Royal Bank of Scotland: The Reserve Bank unexpectedly left the cash rate unchanged at 3.25% in March as it supposedly “kept its powder dry” for when things get worse. With Q4 GDP contracting more than the Bank had forecast, and Deputy Governor Battellino acknowledging this week that he expects to see “further falls in GDP over the next few quarters”, the RBA has clearly revised its forecast for growth down sharply. This raises the risk that underlying inflation will undershoot the Bank’s 2% forecast, and should prompt the Bank to cut the cash rate by 50bp in April (we favour a larger cut given the risk that banks won’t pass all the reduction on to borrowers). Indirect signalling in the media, however, hints that the Bank may well sit on their hands once again this month, leaving considerable uncertainty around our call.

JP Morgan: The key event in Australia next week is the RBA decision Tuesday; our forecast calls for a 50bp cut to the cash rate. We acknowledge, however, that the decision is a close call, just as it was at the last Board meeting in early March. Officials could leave the cash rate unchanged or decide on a modest 25bp rate cut; the probabilities of these three outcomes are broadly similar. The case for a rate cut hinges on whether RBA officials determine they already have delivered sufficient monetary support to counterbalance the impact of the avalanche of bad news on the domestic and offshore economies; our view is they have not. The main counter argument is that RBA officials want to preserve as much of their policy ammunition as possible for use at a later date. In particular, RBA officials will want room to move as unemployment soars. On this, data next week probably will confirm that labor market conditions have deteriorated markedly.

Merrill Lynch: The debate continues to rage as to whether the RBA will extend its policy pause or resume the easing cycle. When the RBA paused in March to assess the impact of the substantial monetary and fiscal stimulus implemented over recent months, the Bank’s preferred strategy would have been to make this assessment over a 2-3 month period. The RBA also wanted flexibility (& additional scope) to respond to the more intense part of the economic downturn and big lift in unemployment over the next 6-9 months.

The question is whether enough has changed in terms of the outlook and risks to the economy since early March to warrant an immediate return to easing policy. In our view, the global and domestic data flow has continued to weaken, although much of this deterioration would already have been factored in by the RBA. This has been mitigated by tentative signs of stabilisation / improvement in some global and local leading indicators of activity.

Key speeches by senior RBA staff over the past two weeks have, on balance, tended to emphasise the stronger relative position of the Australian financial system and the economy, the far more effective monetary transmission to lower interest rates for end borrowers, the very substantial policy stimulus that has been implemented, with further transfer payments to low-to-middle income earners (worth 0.9% of GDP) to be delivered over 2Q09. The RBA also appears encouraged by the recent pick-up in housing demand while the resilience of exports over the March quarter will be welcomed. Importantly, equity markets (up strongly over the past month) and credit markets are performing better, which will help support business and consumer confidence and balance sheets.

In our view, the slight improvement in some data, along with better performance in asset markets and the tone of the RBA’s analysis and communications appears consistent with an extension of the policy pause over April and possibly May.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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