The Reserve Bank governor has given the strongest indication yet that interest rates will be cut in June.

Key points: RBA governor flags rate cut at June 4 meeting

RBA governor flags rate cut at June 4 meeting Rates have been on hold at 1.5pc since the last cut in August 2016

Rates have been on hold at 1.5pc since the last cut in August 2016 A 25-basis-point cut would take the RBA's cash rate target to a fresh record low of 1.25pc

In a lunchtime speech to economists in Brisbane, Philip Lowe said the RBA had decided at its last meeting that inflation would not rise back to the 2-3 per cent target unless unemployment fell.

The latest April jobs data, released last week, showed unemployment rising to 5.2 per cent from a low of 4.9 per cent earlier this year.

"A lower cash rate would support employment growth and bring forward the time when inflation is consistent with the target," he said.

"Given this assessment, at our meeting in two weeks' time, we will consider the case for lower interest rates."

It is extremely unusual for the Reserve Bank to explicitly flag that it will be discussing lower interest rates at its upcoming meeting, hence making it extremely likely that discussion will result in a rate cut.

Markets increased their bets on a rate cut from 61 to 72 per cent once the speech was publicly released at 1:10pm (AEST), and the Australian dollar eased slightly from 69.11 to 68.9 US cents. The Australian share market also received a modest boost.

The likelihood of a rate cut sooner rather than later had already been highlighted in the RBA's Statement on Monetary Policy earlier this month.

In that quarterly document, fairly weak growth and inflation forecasts were underpinned by the bank's use of market pricing for interest rates, which then implied two cuts over the next year.

"If, instead, we had used an assumption of unchanged interest rates, the growth forecast would have been lower and the forecast for unemployment would have been higher," Mr Lowe noted.

A 25-basis-point rate cut would take the RBA's cash rate target to a fresh record low of 1.25 per cent, after nearly three years on hold at 1.5 per cent, following a rate cut in August 2016.

If the RBA does cut rates, it will be the first move in Mr Lowe's tenure as governor, which commenced in September 2016.

'Risk of another housing boom'

Mr Lowe observed the Australian economy had slowed, mainly due to very weak household income and spending growth, but the worst of this may have passed.

"We are not expecting a quick turnaround in growth in consumer spending, but we are expecting a gradual improvement," he said.

"This is largely on the basis of an expected pick-up in growth in household income, and a stabilisation of the housing market over the period ahead."

That stabilisation in the housing market is likely to be assisted by the bank regulator APRA's plan to ease home lending restrictions, by dropping its 7 per cent interest rate floor for mortgage application assessments.

However, property analysts are already warning an interest rate cut combined with looser home loan requirements could fuel a rebound in prices.

"Needless to say a combination of loosening credit restrictions plus a cut in interest rates increases the risk of another housing boom, which I am sure that is not what the 'powers that be' would want, but they may well yet get," cautioned Louis Christopher from SQM Research.

Tax cuts are also likely to assist the household sector, with the Government insisting the Tax Office would be able to adjust 2018-19 financial year tax refunds to pass on the increased low- and middle-income tax offset as soon as the new Parliament forms and passes laws to approve the measure.

Mr Lowe again noted that, over the past year, households had been faced with tax increases of almost 10 per cent compared with income growth of just 3.25 per cent.

"We are not expecting it to continue for a couple of reasons," he said.

"First, the tax offsets for low- and middle-income earners announced in the recent budget will boost disposable income and, second, it is likely that we will return to a more normal relationship between growth in incomes and tax paid.

"Our expectation is that the stronger growth in disposable income will flow through into household spending, although this will take some time."