The Reserve Bank of Australia is unlikely to cut its official cash rate today as it will not want to add to the uncertain environment as Australians await the results of Saturday's election.
Counting of votes from the weekend election resumes today. With nearly 80% of the vote counted, neither of the major parties has a majority of 76 seats in the lower house needed to form a majority government.
HSBC Australia and New Zealand chief economist Paul Bloxham said a "hung parliament'', where neither party could govern with a majority, was increasingly likely.
Whichever party formed the government, the lack of a strong majority - or perhaps governing from a minority - was likely to make a reform agenda more difficult.
"The immediate market reaction is likely to be limited as neither party have radically different economic plans, although any reaction is more likely to be negative than positive.''
The RBA would meet today and was expected to keep its cash rate on hold at 1.75% as it would not want to add to the uncertain environment through its policy moves, Mr Bloxham said.
The bank's own post-meeting statement might be even more terse than usual as it sought to remain as neutral as possible.
From a medium-term perspective, the close election result could be negative for the economy. The close result, and potential hung parliament, were likely to make it more difficult to pass budget reforms needed to remedy Australia's structural budget deficit and help protect its triple-A sovereign rating, he said.
"Just as global political uncertainty is on the rise, Australia is now also facing a politically uncertain environment.''
ASB chief economist Nick Tuffley expected the RBA to eventually cut its cash rate to 1.25% and the Reserve Bank of New Zealand to cuts its official cash rate to 1.75%.
In New Zealand, the market remained ``fairly confident'' the Reserve Bank would deliver on a final cut to 2% by the end of the year, but it remained less sure of the timing, with only a 56% chance of an August cut priced in.
"We continue to expect the Reserve Bank will cut in August, in large part due to the elevated level of the trade-weighted index. While the Brexit vote has increased uncertainty on the global economic outlook, domestic data - in particular business confidence and housing - remains robust.''
The ASB continued to expect a cut to 1.75% this year given the weak global outlook, although domestic developments reinforced the risk the central bank might have a high threshold for a rate cut below 2%, Mr Tuffley said.
The Reserve Bank was already concerned about the impact of low interest rates on the housing market and it would take a cautious approach to easing policy. The bank might tighten existing loan-to-value lending restrictions to address its financial stability concerns.
However, the central bank was mindful any impact on the housing market would most likely be temporary, particularly if mortgage rates continued to decline, he said.
The drop in Australian equities due to uncertainty over the result of the federal election may not last long, an analyst says.
The Australian sharemarket opened lower with investors in the dark about the likely outcome of the vote, but low interest rates meant they did not have many better options for their cash, CMC Markets chief markets analyst Ric Spooner said.
