Official Interest Rate at an all time low of 2.75%

The Reserve Bank of Australia (RBA) cut the official cash rate to a record low of 2.75% at its May meeting.  It would appear that predominantly domestic factors were behind the decision to cut rates. Lower-than-expected inflation and evidence of weakness in the domestic economy seem to be the main rationale. Although it came as a surprise that the RBA didn’t choose to take a more cautious approach in reading recent soft economic data and wait for further evidence, the pockets of weakness in the domestic economy and subdued inflation however, supported our view that there was room for one more rate cut in this cycle.

After receiving that 25 basis point cut yesterday, we expect the RBA to remain on hold in coming months, unless we are strongly persuaded by the data.

The AiG performance of construction index fell from 39.0 to 35.2 in April, the second consecutive monthly decline and the lowest in seven months. The decline is disappointing, particularly since interest rates are low. It further raises questions as to the strength of the recovery in housing construction.

The ABS measure of house prices rose by just 0.1% in the March quarter. It was a weak result in comparison to RP data-Rismark house prices, which rose 2.9% over the same period. Annual growth edged up to 2.6% in the year to the March quarter from 2.5% previously. We expect further gains in house prices this year, as lower interest rates continue to support demand.

The trade balance for March posted a surplus of $307mn, the first surplus in over a year. Imports declined 1.1% in March, as slower growth in mining investment is lessening demand for capital imports. Exports rose 0.6% in March reflecting a further recovery from weather disruptions earlier in the year. Given the solid growth outlook for China and the investment boom approaching its peak, further trade surpluses in coming months seem likely.