Where to for the RBA cash rate? Bill Evans and Richard Gibbs see 2%

Two economists – Westpac’s Bill Evans and Macquarie’s Richard Gibbs – predict the cash rate will fall by a further 75 basis points to settle at 2% over 2014.

The forecasts, contained in the latest Bloomberg survey of 26 economists, stand out sharply.

Evans, the first economist to tip the RBA to begin cutting rates in November 2011 has consistently argued that the cash rate will fall to 2%.

Evans tips a 25 basis point rate cut in August followed by another one in the final quarter of the year and one in the first quarter of 2014.

“The Reserve Bank has retained an easing bias, but it is not an urgent one," said Evans following the June decision to leave rates on hold.

“The path of easing from here will depend on developments in demand; the financial markets (the Australian dollar, as it jointly impacts demand and inflation) and the inflation story itself,” he says.

Richard Gibbs was one of eight economists who correctly tipped the RBA to cut the cash rate in May, but his expectation of a follow-up rate cut in June did not eventuate.

He expects a rate cut in August and two more rate cuts in the final quarter of the year.

Both Gibbs and Evans forecast the cash rate to stay at 2% throughout 2014.

However neither economists tip a rate cut in July, joining 21 out of 26 economists polled by Bloomberg who expect the RBA to site on its hands until at least August.

The quarterly inflation update on July 27 (between the July and August monetary policy meetings) is expected to play a key role in guiding the RBA’s decision about whether to cut rates further as will the performance of the Australian dollar.

Australian Financial Review economics editor Alan Mitchell says the "sub-par" economic growth outlook could force the RBA to cut rates further, while also having the challenge of managing the "bumpy" transition away from mining investment to non-mining sectors of the economy amidst a falling Australian dollar.

Among those tipping a rate cut in July are Stephen Koukoulas, the Business Spectator columnist who tweeted yesterday that the RBA would resume cutting rates “soon” and would have regretted its decision not to cut the cash rate in June.

The outlook over the next 12 months is decidedly unclear based on the Bloomberg survey results.

Six economists see rates higher in a year’s time, four expect them to say them to stay the same, nine expect one more rate cut (2.5%),  four expect two more rate cuts (2.25%) and two expect three (2%).