As widely expected, the reserve bank decided to keep rates at a record low of 2.5%.

This was the 9th consecutive hold by the RBA. But the big news of the day, wasn’t that they decided to keep them on hold, but what they would do next.

Next Tuesday night’s budget, and how far the government will go with some of its fiscal tightening, will ultimately have a big bearing on interest rates. For now there are 2 schools of thought:

AMP chief economist Shane Oliver expects the cash rate to finish 2014 up 0.5% from current levels to 3%, but agrees that will depend on whether or not the federal government delivers a “slash and burn” budget. “In four or five months, I think there will be enough evidence that the economy has picked up and, therefore, the case will have built for the RBA to start normalising interest rates. But, that is contingent on the government not getting too aggressive with fiscal austerity,” Dr Oliver said.

JP Morgan chief economist Stephen Walters, sees rates potentially falling further…. “a tough budget, the persistently high Australian dollar and rising unemployment meant the RBA would likely cut the cash rate to 2.25 per cent in August”.

We believe, with longer term rates already starting to rise, the next move will more than likely be up, but with softer-than-expected first-quarter inflation numbers, the RBA is likely to leave cash rates on hold for a few more months to come.

Follow: Subscribe to this post's comments