Rate cuts are a certainty, and soon, if you take the Reserve Bank's latest economic forecasts at face value.

Key points: The Reserve Bank slashes its GDP growth forecast for the year to June to 1.7pc from 3.25 per cent just six months ago

The Reserve Bank slashes its GDP growth forecast for the year to June to 1.7pc from 3.25 per cent just six months ago The bank expects economic growth to recover to 2.6 per cent by the end of this year

The bank expects economic growth to recover to 2.6 per cent by the end of this year RBA forecasts assume two interest rate cuts this year (market pricing) and factor in a boost from the bipartisan planned tax cuts

After putting on a brave face for the past six months or so, as evidence of a severely slowing Australian economy mounted around it, the Reserve Bank has finally capitulated by slashing its economic expectations.

Australia's annual economic growth rate in 2018 was 2.3 per cent, well below the RBA's last forecast (in February, a few weeks before the data came out) that it would be 2.75 per cent.

In response, the bank has hacked its forecast for growth over the year to June from 2.5 to 1.7 per cent — its forecast was as high as 3.25 per cent as recently as November.

It is expecting a modest rebound in growth by the end of this year, back up to 2.6 per cent. But that too is nearly half-a-percentage-point down on its forecast from just three months ago.

But here's the real kicker — the Reserve uses market pricing to determine the interest rates used in its forecast, and the market is pricing two cuts within the next year.

On the Reserve Bank's forecasts that surely makes two rate cuts a certainty, with the possibility of more, and they'll probably come soon.

That's because, even with those two rate cuts, not only is the rebound in growth modest, but inflation will remain under the Reserve Bank's mandated 2-3 per cent target this year, and at the bottom of that range for at least the next two.

Domestic outlook is grim

A big factor in that pick-up in growth is exports which, given they are concentrated in the mainly foreign-owned resources sector, are unlikely to do a lot to boost the domestic economy, bar a bit of extra tax revenue that governments may pick-up.

When you look at the domestic sectors of the economy, the outlook is grim.

Investment in building new homes is expected to be down 6.7 per cent this year, and fall another 5.7 per cent next. Construction accounts for nearly 10 per cent of jobs, so this implies some fairly big job losses, of which there is already early evidence with almost 50,000 jobs lost in the sector over the year to February.

Household consumption is expected to grow just 2 per cent this year — it is nearly 60 per cent of the economy, so no wonder the GDP growth forecasts are weak.

Employment growth is, unsurprisingly, expected to slow, while wage growth remains historically low, although improving marginally.

Real household disposable income is expected to keep growing at about half the rate Australians became accustomed to before the global financial crisis.

Somehow, unemployment is tipped to fall, but only slightly and not until December 2020.

And remember, all this is forecast on the basis that the cash rate falls from 1.5 to 1 per cent this year.

Market traders are currently pricing in only a 25 per cent chance of a cut in June, perhaps having been burnt with their May bets, 50 per cent odds of a move by July and more than 60 per cent by August.

But, given how weak these forecasts are, is there any way the Reserve Bank can resist a rate cut any longer than that? Almost certainly not.

RBA expects banks to pass on rate cut

To prevent a steeper economic downturn, and possible recession, the Reserve Bank is counting on a couple of things.

The first is that its rate cuts, when they happen, will largely be passed on. The RBA says the rising funding costs that triggered independent mortgage interest rate rises from most banks last year have disappeared.

"The increase in banks' wholesale funding costs in 2018 has been fully unwound given the decline in interest rates in short-term funding markets over the course of this year," it noted, pointedly.

"Also, the interest rates at which banks raise long-term debt funding have declined to record lows."

The message to bank bosses — if we cut rates, you'd better bloody well pass it on.

There was also a message to borrowers, with the RBA noting that it was mainly existing customers who'd copped rate increases, while new borrowers or those who switched banks had not.

"New loan rates remain well below the rates on outstanding loans," it observed. The subtext, if you already have a home loan, shop around for a better deal.

The other boost that the bank is anticipating is the bipartisan move to cut taxes for low-to-middle income earners.

"The total benefit to households from the offset is around 0.6 per cent of disposable income each year over the forecast period," the RBA noted.

"Most of the benefit will be concentrated in the September and December quarters when those eligible receive their tax refunds."

So, a couple of rate cuts and a bigger tax refund are the key reasons why the RBA expects the first half of this year to be the nadir of growth.

These forecasts raise a serious question of why the Reserve Bank didn't cut rates in May? Maybe it felt it had to justify a cut first, rather than explaining one after the fact. Perhaps it did want to wait until after the election?

Whatever the reason, having passed up the opportunity to cut rates in May, the Reserve Bank better hop to it if it wants to meet even its dramatically slashed forecasts which, after all, rely on rate cuts.

A move in June is now looking quite a lot more likely.