Interest rates to fall to 3.25% over 2012: shock prediction from Westpac economist Bill Evans
Bill Evans, the Westpac chief economist who first forecast the current RBA interest rate reduction cycle, has indicated that the cash rate will go lower than his long-held 3.75% estimate.
"A combination of the guidance from the RBA with regard to the likely slippage between its cash rate and financial conditions and ongoing economic evidence that lower rates are required point to us now expecting that the low point in this cycle will be 3.25%.
"The next cut of 25bps is likely to happen in August when as we expect the RBA will get further confirmation that inflation remains firmly under control," he says.
"The final cut in the cycle is likely in the December quarter probably in November with all of this contingent on the impact that the Reserve Banks' cash rate has upon overall financial conditions," Mr Evans said today after the RBA cut the cash rate to 3.75%.
"A close read of the governor's statement does not reveal any strong arguments that would normally justify such a deviation from the usual policy of 25bp moves.
"Of course the major change in the data flow since the April board meeting was the lower than expected inflation print and the Reserve Bank does recognise that arguing 'inflation will probably be lower than earlier expected'.
Evans suggests future cuts will depend on the RBA's assessment of the likely impact of a change in the cash rate on financial conditions.
"Two variables are critical here: firstly the exchange rate and secondly private borrowing rates," Evans notes.
"On the exchange rate there is some concern that "the exchange rate remains high even though the terms of trade have declined somewhat".
"However, it is clear that the major source of concern for the Reserve Bank will be the response of the commercial banks to a change in the cash rate.
"In a recent paper the RBA has pointed out firstly that the most significant influence on lending rates was funding costs and secondly that over the last 12 months funding costs have risen by 20-25bps relative to the RBA cash rate.
"In other words, funding costs have not fallen by the full 50bp fall in the cash rate that we had seen in November and December.
"Our interpretation of that paper was the RBA is recognising that the impact of its cash rate on overall financial conditions is no longer as clear as it was prior to the global financial crisis."
Meanwhile analysts suggest Australia's big four banks are unlikely to pass the full 0.5% in official interest rates through to mortgage holders.
Westpac, National Australia Bank (NAB) and the Commonwealth (CBA) gave no immediate indication of their response to the Reserve Bank of Australia's lowering of the cash rate by a surprise 50 basis points to 3.75%, while ANZ are locked into their announcement next week.
Evans notes w
hen "back in July last year, we forecast that the low point in the rate cycle would be 3.75% it was on the assumption that the degree of easing in financial conditions resulting from the cumulative 100bp rate cuts which were assumed in that forecast would be equivalent to double the level of easing, which occurred in November/December 2011 resulting from the cumulative 50-basis-point cut."If as the Reserve Bank itself clearly expects this total level of easing of financial conditions will undershoot the guidelines we saw in November/December then it is necessary for us to lower our cash rate target," he says.
