Westpac forecasts four rate cuts in next 10 months

Larry SchlesingerDecember 8, 2020

Westpac is expecting history to repeat itself over the next 10 months, with the bank forecasting a 25-basis-point interest rate cut tomorrow, followed by cuts in February, May and August next year. 

Based on an improved inflation outlook for 2012, Westpac chief economist Bill Evans says the bank remains of the view that three more rate cuts will follow the forecast Melbourne Cup Day rate cut, taking the official rate to 3.75% by the third quarter of 2012. 

“The board has changed rates at every one of the last five November board meetings, beginning in 2006. Governor [Glenn] Stevens, who was appointed in July 2006, has changed rates at the November meeting every year he has been in office,” says Evans. 

“It is not a coincidence the bank has been more active in November, February, May and August. 

“Since Governor Stevens was appointed, he has changed rates on 19 occasions – 10 (including five in November) in either November, February, May, or August and 9 in all the other remaining eight months. 

“November, February, May and August provide the bank with new information on the inflation track (released quarterly in October, January, April and July) and precede by four days the quarterly Statement on Monetary Policy. In this statement, the bank is able to set out its growth and inflation forecasts for the next three years and provide a detailed explanation for any change in policy,” Evans says. 

The bank was the first of the major lenders to forecast an interest rate cut before the end of the year. 

Since July, the bank had been forecasting a rate cut in December, but altered its view to forecast one tomorrow based on the improved inflation outlook.

Source: Westpac 

“We expect that our [inflation] forecast of 2.4% in 2012 is on track to be achieved,” Evans says in the latest Westpac weekly briefing. 

However, Westpac is betting against interest rate markets, which are predicting another 25-basis-point cut in December. 

“There are a number of factors which we think will stay the bank's hand in December. Firstly, it is likely to be a little sceptical about the sharp fall in reported inflation. Note that the Bureau of Statistics is now seasonally adjusting 62 of the 87 expenditure classes in the headline CPI – that compares with 20 under the previous approach,” Evans says. 

“The low 0.3% read on underlying inflation for the September quarter (compared to market forecasts of 0.6%) can be largely explained by seasonal adjustment with the seasonally adjusted headline printing 0.4%, compared to 0.6% for the unadjusted print.” 

Not all economists are certain of a rate cut tomorrow, including HSBC’s Paul Bloxham, who says the most likely scenario is that the bank will sit still. 

CommSec senior economist Craig James puts the chance of a Melbourne Cup Day rate cut at just 50-50.

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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