“It looks like they have finally acknowledged the economy is running below trend,” said RBC Capital Markets senior economist Su-Lin Ong. “Barring a big upside surprise in inflation they are likely to cut in May.” The dollar dropped almost half a cent to below $US1.04 as investors digested the RBA's interest rate commentary. Markets are not rating the prospect of a May rate cut as an 80 per cent chance. Such a cut would be welcomed by those facing variable lending rates and by Treasurer Wayne Swan, who is due to release his fifth budget on May 8. The ANZ Bank, meanwhile, will also hold its regular monthly meeting to set its interest rates on Friday next week, with borrowers waiting to see if the bank again breaks ranks with the RBA to raise rates on its own.

Change in stance

In his statement accompanying the rates decision, RBA governor Glenn Stevens made it clear the central bank is ready to cut interest rates again depending on the strength of March quarter inflation figures, scheduled for release on April 24, a week ahead of the next rates meeting. "At today's meeting, the Board judged the pace of output growth to be somewhat lower than earlier estimated, but also thought it prudent to see forthcoming key data on prices to reassess its outlook for inflation, before considering a further step to ease monetary policy," Mr Stevens said. "The Board’s view was also that were demand conditions to weaken materially, the inflation outlook would provide scope for easier monetary policy." 'Paving the way'

A rate cut also now also appears more likely to economists. St George Bank economist Janu Chan said a rate cut next month was more likely following this decision. “The RBA recognises that growth is weaker than what they earlier expected but they are waiting for inflation data to be released later this month. In this statement they are paving the way for a May rate cut,” she said. In his statement, Mr Stevens also said wholesale funding costs were easing for banks – one of the main reasons the banks gave for their out-of-cycle rate rises in February. “Capital markets are supplying funding to corporations and well-rated banks,” he said.

“At the margin, wholesale funding costs are tending to decline, though they remain higher, relative to benchmark rates, than in mid 2011." Rohan Gamble, director of rates tracking company Mozo.com.au, predicted the commercial banks would hold mortgage rates this time around, beginning with ANZ’s decision next Friday. "It's unlikely that the banks will risk customer and political wrath by pushing through another round of big out-of-cycle rate rises this month, given the majority of lenders have already readjusted their margins and the cost of wholesale funding is reported to be easing,” he said. Demand The RBA said domestic demand ran at its fastest pace for four years in 2011, helped by private spending.

Loading "Nonetheless the balance of recent information suggests that output growth was somewhat below trend over the year," the RBA said. "There are differences in performance between sectors, and considerable structural change is occurring."