Falling dollar and end to budget surprlus means just one more rate cut: Saul Eslake

The Reserve Bank is only likely to cut the cash rate once more this year with a falling dollar and the government’s decision to abandon its Budget surplus commitment the key reasons, says Bank of America Merrill Lynch (BAML) chief economist Saul Eslake.

“We're only forecasting one more cut in the RBA cash rate because our currency strategists are forecasting that the Australian dollar will fall to $US0.96 by year-end,” says Eslake, who was chief economist at ANZ for 14 years.

A falling dollar, he says, will alleviate, “at least some extent one of the principal sources of pressure for lower rates during 2012”.

Furthermore, he says there won’t be as much pressure on the RBA to cut rates because the government has abandoned its commitment to a budget surplus in 2012-13 “which means that there won't be the same need to offset contractionary fiscal policy decisions with lower interest rates as there would have been had the government stuck by its commitment”.

Eslake says there is some “upside risk” to the BAML strategists' out-of-consensus call on the Australian dollar and “hence some risk that rates could fall by more than the above forecast”.

“That risk aside, if the RBA cuts its cash rate by 25 basis points we would expect the major banks to cut their mortgage rates by an average of 20 basis points," he says.