JP Morgan and other investment banks tip December rate cut

Investment bank JP Morgan has joined UBS and Goldman Sachs by forecasting the Reserve Bank to cut interest rates to 4.25% when it next meets on December 6.

The bank has changed its mind due to the continuing turmoil in Europe, the Australian government’s tight fiscal policy and the strong Australian dollar.

JP Morgan economist Stephen Walters says “escalating global concerns” are the key reason the central bank will continue with its easing policy.

The bank expects a further 25-basis-point cut in the first quarter of 2012, which would take the cash rate to 3.75% for the first time since February 2010.

According to Walters, the forecast cut will be to “mitigate the harm Europe is doing to the economy”.

Both Westpac and ANZ are forecasting interest rates will remain unchanged in December, with the next rate cut tipped for February, but both have said global factors may force the RBA’s hand.

“Provided we don’t see a sharp deterioration in global conditions, February seems the most likely window for another 25bps cut in the cash rate to 4.25%,” ANZ said last week.

ANZ chief economist Warren Hogan says if there continue to be “bad days in the global markets”, then there would be a case for an “insurance cut by the RBA in December”.

The latest six-monthly report by the World Bank on East Asia said the major threat to sustaining strong growth in the region was the continuation of financial turmoil in Europe.