Next rate cut likely delayed until December quarter: Westpac's Bill Evans

The next rate cuts are now likely to be delayed until the December quarter, says Westpac chief economist Bill Evans, following the release of  July RBA minutes.

Evans had previously forecast the cash rate to be cut by 25 basis points in August and September with a final rate cut in the December quarter. 

However, he remains of the view that rates will come down by a further 75 basis points to a low of 2.75% by February/March next year

"These minutes have provided a more detailed picture of the current attitude of the Reserve Bank Board than we saw in the Governor's statement on July 3. However the message is the same. That is that the Board is in a 'wait and see' mode which seems likely to be sustained for some months," Evan says.

"Our view is that with interest rates, as described by the Governor as "a little below medium term averages" the case is already there that policy needs to be more stimulatory.

"However that relies upon our forward view of likely deteriorating prospects in the labour market (unemployment rate up to 5.75% by year's end); underlying inflation dipping slightly below the 2% to 3% target range; and the international outlook remaining fragile.

"Apart from interest rates other determinants of financial conditions are contractionary with fiscal policy tightening and the Australian dollar appreciating despite weakness in commodity prices. Funding pressures on the Australian banks due to strong competition in the domestic deposit market and wide spreads in the wholesale markets continue to pressure the banks.

"As a result of all these factors we remain of the view that the overnight cash rate will eventually come down by 75bps to a low of 2.75%. However, due to the Board's current policy disposition it is necessary to push out the timing of the first cut from August until the fourth quarter of 2012 where we expect two cuts in October/November and December. Even lower rates are likely to be needed in the first quarter of 2013 with the final cut of 25bps coming in February/March."

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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