Will a May cut make the difference?

We didn’t get a rate cut yesterday, but Reserve Bank governor Glenn Stevens and his team appear to be getting the message from the likes of Solomon Lew and Mark Bouris.

Stevens and the RBA board made a marked shift in tone yesterday, admitting that economic growth was not quite as they had expected and if inflation remains benign – we’ll get the next official data on April 24 – then there will be room to wind rates back.

Every economist I’ve read is now tipping a rate cut in May, with the official rate likely to fall 25 basis points to 4%.

There were a few positives to take out of the RBA’s post-decision statement.

Firstly, it’s good to see the bank’s board and executives have recognised that things are not humming along in all parts of the economy. The statement made reference to soft house prices, soft labour markets, and big differences between the performance of sectors and structural change (something the RBA is clearly watching very closely).

Recognition that not everyone is doing as well as the mining sector is welcome.

Another positive is the general feeling that the international situation, including Europe, has stabilised, even if it’s still a long way from being sorted.

A third positive was highlighted by CommSec’s Craig James, who says that Australia’s economy remains in pretty good shape and a May rate cut could set the scene for a real improvement in some of those struggling sectors.

But I’m still a bit worried about the impact of a May cut.

The problem with cutting in May is that it will happen a week before the Federal Budget.

While Wayne Swan is doing the standard treasurer trick of warning of a tough budget, he’s not really foxing – the Government will need to swing the axe to keep its promise of delivering a surplus for 2012-13.

Could any warm fuzzy feeling from a rate cut be cancelled out by a tough budget? You would have to think there is a good chance.

Most economists say the RBA will sit tight after May, although Westpac still believes the bank will cut again, probably in July.

The bank’s economists, led by Bill Evans, have been notably more pessimistic than many colleagues, although as the publishers of the nation’s key consumer confidence measure they may have a better sense of the fragility of household sentiment.

Time will tell if Westpac’s right, but rest assured – the first two weeks of May will tell us a lot about consumer and business confidence for the rest of 2012.

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