Cash rate to be kept on hold tomorrow: HSBC

In an RBA Observer note on Friday, HSBC chief economist Paul Bloxham pointed to the "upside surprise" of last week's first-quarter GDP figures, which increased by a stronger-than-expected 3.1 per cent year-on-year.

The ASX 30-Day Interbank Cash Rate Futures June 2016 contract was pricing in a 95 per cent chance of 'no change' to the cash rate on Friday.

"The stronger GDP, combined with the signs of continued modest improvement in the labour market, are likely to keep the RBA from considering a cut in June or July," Mr Bloxham said.

Given that the "driving factor" behind last month's cut to 1.75 per cent was the "surprisingly weak" first-quarter CPI print, the RBA will need to see the second-quarter CPI figures (due to be released in July) before it considers a further cut to 1.5 per cent, he said.

While HSBC's 'central case' is an RBA cut to 1.5 per cent following the second-quarter CPI print, increasingly hawkish commentary from the US Federal Reserve is a risk to the bank's forecast, Mr Bloxham said.

An improving US economy and a more aggressive Federal Reserve mean the US market is pricing in a 55 per cent likelihood of a Federal Reserve rate increase by July, he said.

"A key result of the more hawkish Fed has been a depreciation of the AUD, which has fallen from US$0.78 in mid-April to around US$0.72 recently," Mr Bloxham said.

"We see the RBA on hold in June and July, and have a cut pencilled in for August, after the Q2 CPI. However, the risk to this view is that the RBA delivers less, not more, in our view."