Concern about a deteriorating economic outlook and a resurgent Australian dollar will force the Reserve Bank to cut interest rates on Tuesday, taking the official cash rate to an all-time low of 2 per cent and discounted mortgage rates to just 4.55 per cent.
The Australian dollar touched US80¢ on Thursday, a level the Reserve Bank governor Glenn Stevens has previously said was well above its fundamental value.
Among the concerns driving the bank is a realisation that unless it cuts its cash rate on Tuesday, financial markets will stop believing that it is prepared to cut and push the dollar even higher.
After keeping rates steady throughout 2014, the bank cut its cash rate from 2.5 per cent to 2.25 per cent in February on the back of new forecasts that showed economic growth deteriorating.
It didn't cut again in either March or April and some market economists concluded that it was no longer worried about economic growth and would not cut further.
Updated forecasts
In fact, the Reserve Bank board was without updated forecasts in those months, and was waiting until May, when the next set of quarterly forecasts was due.
Those forecasts are being delivered to board members on Friday and will be made public on Friday next week. They're likely to show either a further deterioration in forecast growth or no change, meaning that the outlook has not improved in the way that the board had hoped.
Of most concern to the bank is new data on business investment plans, which shows that not only is mining investment set to fall sharply in 2015-16 but that non-mining investment is expected to fall as well, despite the talk about new economic drivers emerging to take the place of mining.
Coal and iron ore export prices have deteriorated further since the board's February meeting, even after the partial recoveries in recent weeks.
The exchange rate is higher, making Australian businesses less competitive.
Although the unemployment rate is no longer climbing and is now broadly steady at a touch over 6 per cent, the RBA is concerned that economic weakness is apparent in other channels, with historically low wage growth holding down an unemployment rate than would otherwise be climbing.
The 0.25 per cent cut in the Reserve Bank's cash rate would slice a further $48 of the monthly cost of servicing a $300,000 mortgage. It would take standard bank variable mortgage rates to around 5.4 per cent and discounted rates to 4.55 per cent.
House price concern
Although the Bank is concerned about the effect another of cut on Sydney house prices, it is prepared to rely on its sister regulator, the Australian Prudential Regulation Authority to ensure banks do not cut their lending standards further in order to drum up more business after the cut. It is far less concerned about prices in other cities.
The RBA is acutely aware that the upcoming federal budget will do little to boost the economy, in part because the government would run the risk of losing its AAA credit rating, a prospect raised by the rating agency Standard & Poor's on Thursday.
While harbouring some doubts about how effective a further cut in interest rates would be boosting the economy, it believes it has little choice but to try.
The Australian dollar slid half a cent from US 79.75 cents to US 79.32 late Thursday when a version of this story was posted online.
