Westpac sticks to its December rate cut forecast

Westpac continues to stick its neck out and forecast an interest rate cut before the end of the year following the release of the minutes from the September RBA monetary policy meeting.

Westpac chief economist Bill Evans says the minutes suggest an October rate cut is a possibility, but he believes December – the bank’s long-held and lonely position – to be the most likely date.

Evans notes the extensive use of the word “weak” when describing domestic economic conditions in the minutes – “for private non-residential building approvals; for the housing market; and for the demand for credit”.

“Financial conditions are described as tighter than normal,” he says.

In contrast to the Westpac position, Commonwealth expects a rate rise in the first quarter of 2012 while NAB expects rates to remain on hold until November next year.

Evans places particurlarly focus on the final line of the minutes: “For the present, however, members considered that the current setting of monetary policy left the board well placed to respond to evolving global and domestic economic conditions.”

“One way to look at this is to note that if the board was considering the possibility of lower rates then to have a monetary policy setting that is in the contractionary zone allows ample flexibility to act,” Evans says.

“Indeed the wording of this line does not preclude a rate cut in October. That is not our view but we have to note that the Bank's language has evolved very quickly away from a very hawkish tightening bias over the last few months.”

Evans notes the prominent mention of the deteriorating global economic outlook in the minutes and the fact that RBA optimism about the medium term growth outlook is qualified by the statement "providing that the world economic outlook did not continue to deteriorate".

“Commentary on the current economic environment is more downbeat than in previous minutes, "near term growth outlook looked somewhat weaker than had been expected earlier", "the broader economy was softer than earlier expected".