Preview of the RBA monetary policy board decision due Tuesday 5 May 2015 at 2.30pm local time (0430GMT).

The most recent survey by Bloomberg show 22 of 26 economists expect a 25 basis point cut to the cash rate - from 2.25% to 2% (those expecting on hold are NAB, HSBC, Macquarie and Market Economics)

OIS pricing is not quite so sure, at a 75% probability of a 25bp cut

The arguments both for and against a cut are well known. In brief:

  • Business confidence is low
  • Business investment is low and the outlook is not strong. Non-mining capex, which the RBA is looking for to improve is a particular concern as intentions are not growing
  • Public investment (fiscal) is not supporting the economy to the extent the RBA wants (the would be a point made by many central banks across the developed world)
  • The outlook is for sub-trend economic growth
  • While unemployment looks to have stabilised (on the most recent Australian Bureau of Statistics figures), the RBA is concerned it may tick higher than forecasts
  • Concerns over the outlook for China, a huge export destination for Australia (while on the subject of international concerns, the path of Fed rate hikes looks to be a little further off due to Q1 weakness ... the RBA are looking for Fed hikes to take some of the strength out of the AUD)
  • Concerns over the terms of trade decline and perhaps declining further (although the recent bounce in the iron price, for example, will be welcomed by the bank)
  • The Australian dollar - the RBA will not want to see the local currency strengthen further and would welcome further decline. (I've heard the argument that if the banks cuts they remove the threat of cutting and thus will embolden AUD buyers. I don't think this necessarily holds, a cut to 2% today does not preclude further cuts in the future).
  • Inflation is not an impediment to a cut (yesterday's private inflation survey showed subdued pressures)

It should be noted that its not all doom and gloom - there are signs of strength around. For example, business confidence has shown some sign of recovering. Building approvals (data yesterday), for example, continue to show strength.

Of course, many of these arguments have been pertinent for months (and months, and months, and months, according to many economists) ... so why a cut today?

The bank has updated its forecasts for the Australian economy (details will be in Friday's Statement on Monetary Policy) and are of the opinion a boost is now needed. (Just a reminder for those that may need it, the bank cannot do much more than change interest rates, its not within the power of the RBA to cut taxes, boost taxes, cut pensions, boost pensions, cut benefits, boost benefits .... and so on).

What about the surging property market, won't a rate cut further inflate 'the bubble'? Surging prices are a particular problem in Sydney and to a lesser extent Melbourne. Outside of these two centres the surge is not nearly so pronounced. The RBA views this issue as one for local intervention (perhaps via macroprudential tools) not a system-wide solution.

Finally ... a well-connected local journalist has tipped today. Ryan was quick off the mark last week to get the news out to ForexLive traders. I've been in the 'no cut' camp for the past 2 months, and I was for today again until that tip-off from the Sydney Morning Herald's Peter Martin. The decision is a close one, but I've been convinced since the article appeared last Thursday that today is the day for a cut.