In a recent update, HSBC Global Research said that although growth is rebalancing, the RBA is likely to cut rates tomorrow as a result of low inflation and recent mortgage rates rises.
The update said the most compelling argument for a rate cut is that inflation has surprised on the downside, with underlying inflation currently at 0.3 per cent quarter on quarter and falling to 2.2 per cent year-on-year. This is close to the bottom of the RBA’s two to three percent target band.
“This tells us that there is more spare capacity in the economy than previously thought.
“Although the lower AUD should start to lift imported inflation soon, there were few signs of this effect in the Q3 numbers.
“Although we remain optimistic about the rebalancing of growth and expect growth to pick up next year, we think the path of least regret is for the RBA to cut further to ensure that inflation remains on target,” said HSBC.
AMP Capital chief economist Shane Oliver also argued that interest rates need to be lowered if inflation and real economic growth are below target.
“When economies are operating below full capacity and inflation is below target, interest rates need to run below nominal growth to hopefully boost growth,” Mr Oliver said.
HSBC pointed out that the tightening of domestic financial conditions would not have come as a surprise to the RBA.
However, the update added: “It is not clear that the RBA necessarily wants broadly tighter financial conditions at this point in the cycle.”
UNSW economics fellow Tim Harcourt also said the RBA will cut rates, citing "worse than expected" core inflation.
Moreover, UBS economist Scott Haslem said the RBA is likely to cut the official cash rate, forecasting a cut of 25 basis points to 1.75 per cent.
"There's little here to stop the RBA offsetting recent regulatory inspired retail rate hikes when it meets [on Tuesday]," he said.
However, Westpac managing director and global head of economics and research Bill Evans contends the cash rate will be left on hold.
Mr Evans said as a result of lower than expected inflation measures, the RBA will revise down its forecast for core inflation to December 2015 from 2.5 per cent to 2.25 per cent.
"But it will not be sufficient to change policy," he said.
"We expect it will still hold its forecast for 2.5 per cent through 2016 due to a combination of an expected lift in demand and a lagged impact from the fall in the [Australian dollar]."
