RBA to resume cash rate cuts in October, followed by November and one in March quarter: Westpac’s Bill Evans

The man who first tipped the RBA would start cutting rates in November last year now expects the central bank to resume cutting the cash rate by 25 basis points at its October 2 meeting, having previously favoured a November start.

Westpac chief economist Bill Evans is forecasting another 25 basis points rate cut in November and third rate cut in the 2013 March quarter taking the cash rate to an all time low of 2.75%

This represents a slight change from his Tuesday forecast, following the release of minutes of the RBA's September Board, which Evans said included “some significant signals that the Reserve Bank is close to cutting rates”

On balance, Evans said on Tuesday he expected the rate cutting cycle to resume in November, but that "the ground work has been laid for a move as soon as October".

He now joins three other economists – Shane Oliver from AMP Capital Investors, Stephen Koukoulas from Market Economics and Dominic Bryant from BNP Paribas Asia – who are also tipping a rate cut in October.

Also this week, ANZ research shifted its view on the cash rate cut timings, and is forecasting rate cuts in October and November with an easing bias thereafter.

In today’s RBA bulletin, Evans explained how Westpac’s reasoning had shifted since the release of the September minutes on Tuesday (September 18)

“Our snap first take on the minutes of the September board meeting indicated that the board was close to a rate cut but probably not sufficiently close to bring the first move forward to October.

“In the analysis of the minutes I noted, “today’s minutes of the RBA’s September board meeting show some significant signals that the Reserve Bank is close to cutting rates ... the ground work has been laid for a move as soon as October... We assess that the bank is close to moving on rates but, in a close call, do not assess that there is sufficient evidence from these minutes to revise our view that the cuts are likely in November and December”.

But with time to further analyse the minutes Evans says the odds “now slightly favour an October move rather than waiting until November”.

“The aspect of the minutes which merits most scrutiny is the statement, 'The current assessment of the inflation outlook continued to provide SCOPE to adjust policy in response to any significant deterioration in the outlook for growth'," Evans says.

Evans says use of the word “scope” is significant.

“That word rang a few bells with us. It has been used sparsely but significantly in the past during easing cycles," he says.

“Since August 2008 there have been two easing cycles – August 2008 to April 2009 and October 2011-present. During those cycles there have been 20 board meetings – eight in the August – April period and 12 in the October-present period.

 


 

In the minutes the word “scope” has been used on six occasions in the key paragraphs on Considerations for Monetary Policy.

“Three coincided with the meeting where the decision had been made to cut.

“Arguably, the use of the word at that time emphasises its appropriateness for an easing cycle.”

Some commentators have suggested the RBA will wait until the release of September quarter inflation data due out on October 24, but Evans says the CPI report tends to be more significant in a tightening cycle than in an easing cycle.

“There is less urgency to await the CPI when rates are being cut than when they are being increased. That makes the choice between October and November more complex than if the cycle was likely to be a tightening cycle.”

Evans also accepted that much of its analysis of monetary policy statements and minutes could be described as "pedantic", adding that Westpac Economics “certainly sees its primary contribution to assess the medium term outlook for the cash rate. 

“However, some of our customers are interested in the specific month to month timing of these moves and hence the attempt to put some analysis behind reasons for choosing particular months”.

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

Comments

Be the first one to comment on this article
What would you like to say about this project?