RBA likely to cut rate by 25bps in May meeting

The Reserve Bank Board decided to hold rates steady at 2.25% at their April meeting. There were no significant changes in the wording of the Governor's statement from the statement released following the March meeting. The key terminology around the policy outlook remained the same: "It was appropriate to hold interest rates steady for the time being"; "further easing of policy may be appropriate over the period ahead".

Sentiment around the Australian dollar was unchanged: "a lower exchange rate is likely to be needed to achieve balanced growth in the economy". The degree of concern around the AUD is emphasised by the Bank actually providing a 'forecast' for the currency by noting that "further depreciation seems likely". That is a different approach to previous statements when it has been described as "above most estimates of its fundamental value".

Since the Board meeting in March the price of Australia's major export commodity, iron ore, has fallen by around 30%. The Bank noted that prices for our key exports have been falling and implied that it will be necessary to further revise down forecasts for the terms of trade. This is particularly significant because it will affect the fiscal outlook and further constrain nominal income growth in 2015.

"RBA will choose to cut by 25bps at the next meeting on May 5 and then hold rates steady for some time until it can assess whether its current growth forecast for 2016 of 3.5% is achievable', said Westpac Research in a note on Tuesday.