Though some have scoffed, Westpac announced it expects RBA to cut rates twice this year.
A few days ago, a number of media outlets quotes experts as saying that the notion that RBA might cut interest rates was “ridiculous”.
One said “Are you kidding me?”
But yesterday the chief economist for Westpac, Bill Evans, predicted RBS would cut the cash rate by 25 basis points in August and again in November, bringing it to a historic low of 1 per cent.
The reason for the prediction was Westpac’s forecast that GDP would grow less than previously expected for this year and 2020, changing its prediction from 2.6 per cent to 2.2.
That, in turn, could mean a rise in unemployment to as much as 5.5 percent by the end of 2019.
These figures were included in his latest market report.
“That makes a strong case for official rate cuts to cushion the downturn and, in turn, meet the RBA’s medium term objectives.
“Westpac’s growth forecast in 2019 and 2020 has been a much weaker 2.6 per cent in each year but even that number now appears too high. Our new forecast for GDP growth in 2019 and 2020 is 2.2 per cent.”
Until now, Westpac had held that RBA’s cash rate would remain the same for “the foreseeable future”, which they define as 2-3 years.
According to Mr Evans, their changed forecast was partly based on a change in perspective.
“To an extent this view was influenced by the perception that the Bank welcomed the adjustment in the housing markets and saw insignificant spill over effects to the rest of the economy.
“The recent change of rhetoric from the Bank on that issue is important. Our revised growth, inflation and unemployment forecasts now make a convincing case for lower rates.
“Absent any policy response [to property prices] from the RBA we expect that further falls will be necessary in 2020 before stability in these markets will be achieved.”
“These falls are a combination of both demand (concerns around falling prices and stretched affordability) and supply (new regulations and caution from some lenders in a falling market). We expect these falls, albeit at a much slower pace, to continue through 2019 representing a negative feedback loop to prices.”
Earlier this month, RBA Governor Philip Lowe stated that a rate cut might be possible if the economic downturn was worse than expected.
A reduction to 1 percent cash rate could save a family with a $400,000 home as much as $1,000 a year in interest.
David Plank, economist for ANZ, said that while RBA eventually cuts rates when the markets have turned down, their timing has been inconsistent.
“[T]he lag between the market first pricing a cut and it happening has been quite variable. In the most recent instance, when the RBA cute from 2% to 1.75% in 2016, there was a lag of 300 days.”
