Rate and budget cuts expected

THERE'S something special about Tuesdays at the moment, and they could prove financially beneficial for some of us.

For others, like the Treasurer Wayne Swan and the federal government, there is one particular Tuesday on the horizon that could prove a headache.

It started with the first Tuesday in April when Reserve Bank of Australia governor Glenn Stevens first indicated that there was a growing mood among board members to cut the official cash rate following the monthly meeting.

''At today's meeting, the board judged the pace of output growth to be somewhat lower than earlier estimated,'' Mr Stevens said in his post-meeting statement.

''But [it] also thought it prudent to see forthcoming key data on prices to reassess its outlook for inflation, before considering a further step to ease monetary policy.''

The minutes of that board meeting released two Tuesdays later fleshed-out Mr Stevens' brief statement, listing why economic growth was ''somewhat below trend''.


The board noted the sharp differences in performance between sectors and regions of the economy, the soft overall conditions in the housing sector and the likelihood of significant fiscal tightening.

And despite the unemployment rate showing little change, it was apparent that labour market conditions had softened.

''The board would have the opportunity at its next meeting to review the inflation outlook based on comprehensive new data on prices, as well as information on demand and output,'' it said.

That meeting being on Tuesday.

The said inflation data was released last Tuesday and was seen by many as all but assuring that the cash rate will be cut to at least 4.0 per cent from 4.25 per cent.

The consumer price index rose just 0.1 per cent in the March quarter after showing no growth the previous three months.

This, along with last year's spike in prices in the wake of the Queensland floods and Cyclone Yasi finally washing through the economy, saw the annual CPI shrink to a paltry 1.6 per cent, well below the RBA's 2-3 per cent inflation target.

It was also the lowest annual rate in more than two years.

At the same time, underlying inflation - the central bank's preferred measures of price pressures - grew by an average 0.35 per cent, for an annual rate of 2.15 per cent, the lowest level since mid-1999.

Both results were significantly more benign than economists had expected, and saw financial markets price in the chance of a 25 basis point reduction this Tuesday, or a 60 per cent chance of a 50 basis point cut. National Australia Bank head of research Peter Jolly doubts that the RBA will be panicked into one large cut, but more likely 25 basis point reductions in May and June.

''[Also] the unemployment rate still being around 5.2 per cent tells us the Australian economy is far from collapsing,'' Mr Jolly says.

However, business and housing groups believe only a 50 basis point cut will do in the current economic climate.

Of course, how much households and business benefit from a cut in the cash rate will depend on the actions of retail lenders, and the prospect of them passing on a reduction in full is far from assured.

The Housing Industry Association's chief economist Harley Dale made it clear what he felt about the outlook for interest rates on Tuesday, saying a 50 basis points reduction, while ''bold'', was appropriate.

May 8 brings the federal budget. It will be Treasurer Swan's fifth, and what he concedes will be ''the hardest of them all'' as he aims to return a surplus.

Indeed, based on last November's mid-year budget review it will be the biggest fiscal consolidation in some 50 years - from a forecast $37.1 billion deficit in 2011-12 to a $1.5 billion surplus in in 2012-13.

Canberra-based economic consultant Macroeconomics believes Mr Swan's monumental task is even greater given that it calculates some $10 billion has been wiped off revenues since November, largely as a result of a further drop in business tax receipts.

It expects that before any policy changes - spending cuts or revenue increases - there would be a deficit of $7.8 billion for 2012-13, rather than Mr Swan's expected slim surplus.

At this stage, with the government otherwise keeping its cards close to its best, May's first Tuesday looks like being more beneficial to the hip-pocket than the second. AAP