ANZ predicts no rate rise until February 2012

ANZ has shifted its view on interest rates and now expects no increase until as late as February 2012.

Furthermore, any serious global fallout from Greek sovereign debt issues could see a rate cut for Australians.

In a research note addressing its change of view on monetary policy, the bank forecasts a second interest rate increase (from 5% to 5.25%) by August 2012.

Prior to this change of position, ANZ had, as part of a Reuters’ poll of 22 economists carried out on July 1, forecast a 50-basis-point increase (or two quarter-percentage point increases) by the first quarter of 2012.

The bank says its changed view is “primarily based on a downgrade to our employment outlook due to more mixed conditions in the non-mining economy”.

According to ANZ, an increase in the cash rate in the short term will require second-quarter inflation figures (released in late July) to be 0.8% or greater – an increase it is not anticipating.

In the medium term, the bank expects inflation to trend higher, but says the recent fall in oil prices has taken some pressure off inflation forecasts in the near term.

Any financial market dislocation could see interest rates go down, not up, according to Westpac senior economist Justin Smirk.

“This risk scenario must now also be considered. In the short term this would seem to require a GFC II-type shock, likely emanating from sovereign debt concerns.

“In the medium term, an extended period of soft or softening global growth and lower commodity prices that sees core inflation remain moderate in the lower half of the band (0.5% per quarter or below), employment growth remain sub-par and the unemployment rate begin to drift up could also see the bank change its view about the current setting of monetary policy.”

In the Reuters poll, the bank had forecast the unemployment rate to remain at 4.9% in July.

Westpac, which forecasts a rate rise before the end of 2011, expects the unemployment rate to remain at 4.9%.

It says jobs growth of 15,000 in the June labour force release should be enough to hold the unemployment rate flat.

Total job advertising recovered just over half of the 6.5% decline in May, with a rise of 3.7% in June, Westpac noted.

“To some extent this was a disappointing result suggesting the drop in job advertising in May could be indicative of weaker economic conditions overall rather than just the effects of the Easter/ANZAC Day extended long weekend, which was combined with school holidays,” says Westpac senior economist Justin Smirk.

Aussie Home loans founder John Symond has also weighed into the interest rate debate, warning a further rate rise could trigger a recession.

“There are many reasons why the Reserve Bank should not lift rates, perhaps the most important being the fact that the non-mining economy is slowing, with retail sales and consumer confidence down,” Symond says.

“We are currently seeing a two-speed economy and many non-mining industry sectors are suffering.

“As a result, one or two more rate rises could well tip Australia into recession,” he says.

Out of 22 economists surveyed by Reuters, only one from Goldman Sachs expected interest rates to remain unchanged by the end of 2011.

Of the remaining 2o economists (excluding ANZ, given its new forecast), nine expect rates to be at 5% by year-end while 11 anticipate two rate rises to 5.25% this year.