Australia cuts rates for second time this year

Is the RBA's easing cycle over for now?
Is the RBA's easing cycle over for now?   

The Reserve Bank of Australia (RBA) on Tuesday cut interest rates for the second time this year, but fairly upbeat comments from the central bank are sparking speculation the move could be the last for a while.

As widely expected, the central bank cut benchmark lending rates by 25 basis points to a fresh record low of 2 percent, and comes after a similar cut in February, its first in 18 months.

The Australia dollar fell sharply on the news, hitting $0.7801, before rebounding to $0.7901. Meanwhile, the benchmark S&P ASX 200 enlarged gains to 1.13 percent, from 0.3 percent.

Aussie jumps despite RBA rate cut
Aussie jumps despite RBA rate cut   

In its statement following the decision, the RBA removed the easing bias, saying it was seeing improved trends in household demand over the past six months and stronger growth in employment.

Still, it maintained that a low inflation environment provides further scope for rate cuts, adding that further fall in the Australian dollar is likely and necessary.

According to Paul Bloxham, chief economist for Australia & New Zealand at HSBC, the surprisingly upbeat comments from the RBA could mean the central bank is done with rate cuts for the year.

"That's a really interesting result from the RBA, that they are a bit more upbeat. They're telling us household demand is picking up, employment looks as though it's been trending higher the past six months," Bloxham said.

"The key question is now do they cut any further from here... I suspect that we may see them on hold now for the rest of this year at least, while they watch the impact of the cuts that they've already delivered," he added.

Lisa Maree Williams | Bloomberg | Getty Images

Greg Gibbs from RBS agrees the tone of the statement suggested "further cuts are much less likely."

"The fact that the RBA sees spare capacity still opens the door for additional cuts, but it appears to have upgraded its growth outlook to around trend ahead of this cut, and by cutting rates further today arguably it has edged the outlook slightly towards above trend growth," he said.

"Obviously there is considerable uncertainty... but for now the RBA has essentially returned to a neutral bias," he added.

Capital Economics, however, believes the central bank is not done.

"Our forecast that both GDP growth and underlying inflation will be weaker this year than the RBA expects suggests that rates could yet fall to 1.5 percent by December," Paul Dales, chief Australia & New Zealand economist at the research firm, wrote in a note.

He expects economic growth "will slow from 2.7 percent last year to just 1.8 percent this year, due to the lagged effects of the sharp fall in commodity exports. As such, "the cut in interest rates today is unlikely to be the last in this cycle," he said.

Australia's economy has been hampered by a sharp drop in commodity prices, weak external demand and persistently high unemployment.

A ballooning budget deficit, which Deloitte Access Economics estimates will be a whopping 46 billion Australian dollars this year, is putting the nation's triple-A credit rating at risk. Goldman Sachs warned last week that the plunge in iron ore prices in recent months could slash another $55 billion off government revenues over the next four years.

Australia emerged from the global financial crisis relatively unscathed, but it continues to struggle with narrowing the gap in its two-speed economy as its resources sector winds down.

Ben Jarman, senior economist at JP Morgan, says Tuesday's rate cut is a prelude to the RBA lowering its growth forecasts in its quarterly statement due Friday.

"In RBA's statement earlier in April and also in the minutes released a couple of weeks later, they mentioned the fact that the terms of trade have started to fall pretty sharply again and that's the kind of thing that can transmit to an even weaker outlook for mining investment than they currently have penciled in," Jarman said.