Most economists expect the Reserve Bank to keep the cash rate on hold at its May meeting, but a small group of senior strategists — including one former board member — has begun to argue, increasingly publicly, that a quarter-point cut would be both unexpected and sensible.

The argument rests on three observations. Headline inflation has fallen for four consecutive quarters. The unemployment rate, while still low, has begun to drift upward in services. And, most significantly, mortgage stress has moved from a concentrated phenomenon in outer suburbs to a measurable signal on bank balance sheets.

The case for holding

The case for holding remains stronger, on the surface. Inflation, while falling, is not yet within the band. Wage growth has surprised on the upside in two of the last three quarters. The labour market, despite some softening, is still operating above the level the Bank has historically considered consistent with a sustainable two percent inflation.

Most major bank economists are forecasting a hold, with cuts pushed back into the second half of the year. Their published reports use almost identical language: the Bank is expected to want 'more data' before moving.

The case for cutting

The case for cutting, by contrast, rests on the lag with which monetary policy operates. By the time the data is unambiguous, the argument runs, the Bank will be late. Cutting in May, with the economy already softening, would simply mean acting on the trajectory rather than the level.

"The Bank moves on the trajectory or it moves on the level. Rarely both at once."

What the markets expect

Markets, as of Tuesday's close, had priced in a roughly fifteen percent chance of a cut. That is a higher number than it was a month ago, and a meaningfully higher number than it was three months ago. Whether the Bank validates the slow drift in market expectations, or pushes back against it, will be the most consequential decision it has taken in over a year.

The Governor's post-meeting press conference, regardless of the decision, will be watched as carefully as the decision itself. The wording of the statement — and the gap between that wording and last meeting's — is the lever by which the Bank communicates its trajectory.