Westpac expects RBA and USA to delay rate cuts: Bill Evans

EXPERT OBSERVER

Westpac now expects that the Reserve Bank will delay its next cut in the cash rate to April with the final cut to 0.25% occurring in August.

Prior to the release of the surprisingly strong December Employment Report we had expected the cuts to be timed for February and June.

Our analysis of the December Board Minutes highlighted that, with the Board committing to review its assessment of the economy in February, it seemed likely that the Board would have been prepared to cut the cash rate by 0.25% at that meeting.

However we did note that, “The flow of economic data over the next six weeks will be critical to that decision, particularly the labour market; retail sales and confidence”. (Economic Bulletin, December 17).

Although the November retail sales report printed a strong 0.9% we were comfortable to attribute much of that out performance to the “Black Friday” effect expecting a sizeable pull back in retail sales in December, (to be released on 6th of February).

The Westpac-MI Consumer Sentiment Index fell by 1.8% in January to 93.4 – consistent with a down beat consumer.

However, the Employment Report was always going to be the most important data release.

Recall that in the December minutes the Board concluded that, "The Board would continue to monitor developments, including in the labour market, and was prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time”.

The November report showed a tick down in the unemployment rate from 5.3% to 5.2% – Westpac expected that the December Report would see a reversion back to 5.3% but the actual report printed a further fall in the unemployment rate to 5.1%.

This fall in the unemployment rate is not unprecedented. Over the last five years there have been six occasions when the unemployment rate has fallen in back to back months by a total of 0.2% or more.

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BILL EVANS is the Chief Economist for Westpac