Until the unemployment report came out on Thursday, economists and analysts were anticipating a larger cut on the overnight cash rate when the Reserve Bank of Australia meets in May. Their expectations range from 25 to 75 basis points rate cut.

The chances of a larger interest rate cut became dimmer when the Australian Bureau of Statistics (ABS) released its monthly report and surprised Australians with a 5.2 per cent unemployment rate, contrary to analysts' and economists' forecast of 5.3 per cent. Instead of only 5,000 jobs created, 44,000 were created in March.

Another factor that would be against a large cut in the interest rate is that funding costs are starting to go up again over fears that the European debt contagion is spreading further. The credit default swaps of the big four Australian banks have gone up in the past week. The five-year swap rate of ANZ and National Australia Bank (NAB) rose to 149 basis points from 139 basis points in one week, that of Commonwealth Bank of Australia went up to 145 from 139 basis points and Westpac's increased to 149 from 140 basis points, The Australian reports.

If the RBA would cut the cash rate by at least 25 basis points, banks would likely have to make the unpopular decision of raising their variable mortgage rates independent of the central bank's policy direction and incurring the ire of borrowers.

The higher credit default swap rates, which are measures of the risk of default and often indicators of funding costs, are due to the markets remaining cautious over fears of the future of Spain and Italy after their bond yields went up in recent weeks over upcoming debt deadlines.

While the global situation was cited by Australian business leaders as reasons for the RBA to reduce interest rates in May to help boost the country's economy, the ABS report almost dashed hopes of a larger rate cut.

Richard Goyder of Wesfarmers is still hopeful of an RBA rate cut to support economic growth.

"But I do think that the economy could do with some stimulus at the moment... Australia does have some room on monetary policy," Mr Goyder said.

"Consumers are really concerned at the moment so I would be hopeful that it won't be too long before we get another interest rate cut," he added.

Employment Minister Bill Shorten pointed out that at 5.2 per cent, Australia's unemployment rate is one of the lowest in the industrialised world and less than half of the eurozone's.

"Today's result is particularly encouraging in the face of ongoing global uncertainty and difficult conditions facing some sectors, like the pressures from the high dollar and cautious consumer," Mr Shorten said in a statement.

NAB Capital chief economist Rob Henderson admitted the ABS report was a surprise, but insisted that the growth in jobs generation is still weak. He said the report does not damage the chance for a 25 basis points RBA rate cut,.

"One thing is for sure though, this does nothing to aid the case for a 50 basis-point cut," Mr Henderson was quoted by Skynews.

Central Bank Governor Glenn Stevens has indicated that while a rate cut is being considered, the board wants to see key inflation data on April 24 before it would make a final decision on easing monetary policy.

"Let's hope there is not an upside surprise in underlying inflation... because that actually could scuttle the chances of a rate cut in May," Mr Henderson said.

Source:IBTimes