02 September 2013 Westpac’s Bill Evans sees two more rate cuts

There is a likelihood that the Reserve Bank will cut the cash rate again this year – though not in September – and scope also remains for a further rate cut in February, according to Westpac economist Bill Evans.

Evans was the first economist to correctly tip the current easing cycle to begin in November 2011 and was also one of the first to forecast that the cash rate would fall below 2.75%, which it now has.

He is one of just two economists – the other being Richard Gibbs, head of economics at Macquarie Research – who see a terminal cash rate of 2% - 100 basis points below the emergency setting during the GFC.

In a note following yesterday’s rate cut and accompanying statement, Evans highlighted that the government had raised its unemployment forecast for 2013-14 from 5.75% to 6.25% and expects unemployment to remain at this level over the course of next year.

“We expect that the Reserve Bank feels the same way [about unemployment], although Friday's statement on monetary policy will only include growth and inflation forecasts.

“We expect the Bank would therefore have no hesitation in cutting rates again once more information is available on inflation which will print in late October and the response of business/consumers to the election result has been clearly signalled.

“We also believe that these dampening forces will be sustained through into early 2014 providing scope for another cut in February,” he says.

All 28 economists surveyed by Bloomberg following yesterday’s rate cut were in agreement that there won’t be a rate cut on September 3 – just four days before federal election

However nine out 28 forecast one rate cut in the final quarter of the year including Bill Evans and NAB’s Alan Oster.

Macquarie Research's Richard Gibbs believes there will be two rate cuts before the end of the year.

ANZ economist Ivan Colhoun says the risks for interest rates remain for downward movement with the potential for two more rate cuts “from here, and again, little indication of any upward pressure on rates in the near term”.

Downside risks reflects ANZ’s “strongly-held view that mining investment will weaken significantly over the next 18-24 months and our less strongly held view that other parts of the economy will pick up sufficiently strongly so as to offset this effect”.

“The trend for the unemployment rate, job advertising and capacity utilisation confirm that at this stage, the improvement in the interest-sensitive sectors is not sufficiently strong.

“Based on the trend for these series, the pressure on Australia’s cash rates remains downward and there remains very little prospect of any rise in cash rates before 2015,” he says.

Reproduced in full with permission: Property Observer Westpac’s Bill Evans sees two more rate cuts but all economists agree on no RBA move in September 7 August

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