Cash rate could fall to 3.25% by August: Westpac’s Bill Evans
Westpac chief economist Bill Evans says the Reserve Bank could cut rates by 50 basis points over the next three months, taking the cash rate to a three-year-low of 3.25%.
He bases this expectation on the deteriorating situation in Europe and “disturbing weakness” in sectors like retail, manufacturing, construction and tourism.
In addition, growth expectations for the Australian economy are now tracking below trend, according to the annualised growth rate of the Westpac–Melbourne Institute Leading Index.
The index indicates the likely pace of economic activity three to nine months into the future was 2.2% in March 2012, below its long-term trend of 2.9%.
“That profile is consistent with Westpac’s forecast for growth in the Australian economy in 2012 of 3% which would mean that Australia had grown below trend for five consecutive years,” says Evans.
The last time the cash rate was at 3.25% was in April 2009, when the RBA was curbing the effects of the GFC, beginning in November 2008 with a 75-basis-point cut.
The lowest the cash rate has been since 1990 is 3% – the rate set by the RBA in October 2009.
“We saw in December last year that the Reserve Bank was prepared to cut rates almost entirely due to its concerns around Europe and relative to December the risks around Europe are now decidedly more severe,” says Evans.
“Back in December the bank assessed the Australian economy as growing around trend whereas now there is explicit recognition of the disturbing weakness in sectors such as retail; manufacturing; construction and tourism.
“Policy settings have eased since December, but only from ‘mildly contractionary’ to ‘mildly stimulatory’.
“Therefore there is a very strong case for further policy easing. The exact timing and extent of the easing is likely to be dictated by global events in the run up to the next meeting but the important point is that the official cash rate is very likely to be lower by at least 0.5% over the course of the next three months.”
