Scope for more rate cuts says Westpac’s Bill Evans, the first to tip a 2.75% cash rate

Scope for more rate cuts says Westpac’s Bill Evans, the first to tip a 2.75% cash rate
Scope for more rate cuts says Westpac’s Bill Evans, the first to tip a 2.75% cash rate

Westpac chief economist Bill Evans got the timing of yesterday's cash rate cut wrong – tipping June instead of May – but believes a “further move could still possible”.

Evans, the first major bank economist to correctly tip the RBA to begin its easing cycle in November 2011, was also the first to forecast that the cash rate would fall to 2.75%, doing so back in May last year.

“The overnight cash rate has now reached 2.75% which was the target we nominated in May last year when the consensus view was that rates would bottom out at 3.25 to 3.5%," said Evans in a note following the RBA's decision yesterday to cut the cash rate.

“We have been reluctant to moderate that target although have argued consistently that the risks have been to the downside and have intensified over the last month. In light of yesterday's decision we are currently evaluating the outlook," he says.

"We have consistently argued that 2.75% would be the low point but that risks are to the downside for the cash rate. We are currently assessing that outlook," he says.

The bank is tipping the cash rate to fall again by 25 basis points to 2.5% in June and then to eventually bottom out at 2% by the first quarter of 2014.

Evans says the governor’s statement indicates further easing may be on the cards.

“[Yesterday’s] statement by the governor points out that a further move is possible.

“The final paragraph of the statement makes the following point:

'The Board has previously noted that the inflation outlook would afford scope to ease further, should that be necessary to support demand. At today's meeting the Board decided to use some of that scope. It judged that a further decline in the cash rate was appropriate to encourage sustainable growth in the economy, consistent with achieving the inflation target.'

Evan said it was also significant that the Governor did not choose to use the term: 'The Board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand and inflation outcomes consistent with the target over time.'

Evans has argued since May last year that a drop in the cash rate to 2.75% would not result in bank variable rates at equal record lows, given that previous rate cuts have not been passed on in full, while there has also been small increases in variable mortgage rates outside of an official RBA increase.

Evans highlighted this point again in his commentary following yesterday’s decision.

“It is significant that while the cash rate has now been reduced to 2.75%, below the 2009 lows, borrowing rates are described as "approaching previous lows".

“This is somewhat of an overstatement given that official RBA statistics nominate the low point on the standard variable rate at 5.75% in May 2009 compared to 6.45% before today's decision," he says.

He adds that headline mortgage rates are "complicated by special discounts which banks consistently offer” similar to a point made by Commonwealth Bank CEO Ian Narev in February, when he said that no borrower paid the bank’s standard variable rate -  every borrower’s rate is set relative to this benchmark rate.

Were ANZ to pass on 25 basis points on Friday as the three other major banks have done already, the average standard variable rate of the big four would be 6.17% - still someway off the May 2009 record low.

Evans says the argument for the RBA to consider a further rate cut are contained in the post-decision statement.

"The description of the domestic economy has taken a step down from previous statements. Growth in the second half of 2012 is now described as 'a bit below trend' and 2013 to date is described similarly," he says.

"Employment is assessed as not being strong enough to absorb the labour force explaining the rise in the unemployment rate and probably indicating further increases in the future.The peak in mining investment is assessed as being in 2013 while the demand for credit remains relatively subdued.

"On the positive side, consumption is described as 'strengthening' and there are prospects for some increase in non-mining investment. The description of the all important housing market is fairly downbeat with dwelling investment described as 'modest firming' and asset values 'have risen'.

"Of course the recent unexpectedly low print on inflation is assessed as 'a little lower than expected' while labour costs have moderated slightly and productivity growth appears to be improving.

"Finally the governor once again points out the unusual elevated level of the exchange rate given that export prices and interest rates have fallen markedly over the last 18 months with the exchange rate remaining relatively steady," Evans says.

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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