Interest rates are expected to remain on hold for the sixth consecutive month as the Reserve Bank holds its first board meeting since the federal budget.
Governor Glenn Stevens will today make his first public comments on last week's national accounts and the May budget as the central bank reveals its hand on the cash rate. If the RBA does not lift rates today, it will be the longest stretch of a steady cash rate since June 2007.
Although markets and analysts predict no change to the RBA’s cash rate of 4.75 per cent, analysts say the central bank will eventually need to lift rates in coming months to contain inflation pressure from the commodities boom.
‘‘The timely data for the Australian economy have been on the softer side over the past month,’’ said HSBC chief economist Paul Bloxham, who noted employment numbers have been falling, house prices have weakened and wages data over the past month were moderate.
‘‘I suspect the RBA will want to watch to make sure there isn’t anything more sinister in these numbers,’’ he said.
Macquarie Research senior economist Brian Redican does not believe the case for an interest rate rise is ''at all compelling''.
''But given the RBA's confidence in the outlook, the risk of a [policy] tightening is likely to be higher than the market has priced in,'' Mr Redican said.
Holders of variable rate mortgages have become more sensitive to interest rate moves in recent years as the size of the loans have increased to keep up with Australia’s soaring home prices. A 25 basis point interest rate, if passed along in full to consumers, adds about $47 to the monthly payment on an average $300,000 loan over 25 years.
Financial markets see about a 10 per cent chance of a rise in the official cash rate at the central bank's monthly board meeting - to 5 per cent from 4.75 per cent, where it has stood since November last year.
The central bank has previously warned that the cash rate will have to rise ''at some point'' because of potential inflation pressures from a record terms of trade and a massive business investment pipeline as a result of the mining boom.
''It seems clear to us that the RBA has cleared the decks to tighten rates,'' NAB Capital chief economist Rob Henderson said.
But Mr Henderson said the central bank would have been prepared for a weak gross domestic product number for the March quarter in the wake of this summer's natural disasters, but not as bad as it came in.
Despite weaker home prices, wobbles in the economic recovery in the US and fears for the euro debt crisis, the Asia-led commodities boom is expected to make more interest rate rises necessary.
The RBA, in a May 6 update on monetary policy said, ‘‘further tightening of monetary policy is likely to be required at some point’’ if the central bank aims to keep the inflation rate in check.
Last Wednesday, national accounts for the first three months of the year showed the economy shrank by 1.2 per cent, the largest quarterly decline in 20 years.
At the same time, more up to date economic data suggests the economy is far from firing on all cylinders and price pressures in the economy have yet to take hold.
New data yesterday showed the number of job advertisements, a key pointer to future employment growth, tumbled 6.5 per cent in May. This was the second consecutive monthly drop, which has not occurred in nearly two years.
Newspaper job ads fell by 2.7 per cent in May, while internet job ads dropped 6.6 per cent.
The TD Securities-Melbourne Institute monthly inflation gauge also showed prices grew by just 0.2 per cent in May, trimming the annual rate to 3.3 per cent from 3.6 per cent in April, albeit remaining outside the RBA's 2 to 3 per cent target band.
Its underlying measure of inflation was also subdued.
''Not only has the latest data shown an easing in inflationary pressures, hiring intentions have slumped as businesses join consumers in adopting a conservative posture,'' CommSec chief economist Craig James said.
''There is no smoking gun, so interest rates are almost certain to remain on hold for another month.''
Still, borrowers should not get too comfortable.
The economy is widely expected to accelerate during the rest of the year, meaning the RBA will not sit on its hands indefinitely.
AAP with Chris Zappone