Two more rate cuts: Westpac
WESTPAC’S economists expect the Reserve Bank to cut the cash rate two more times next year.
The latest Reserve Bank statement on Tuesday followed the release of the minutes of the Board’s meeting this month.
The Board is ‘‘ continuing to gauge the effects, including in the housing market, of the substantial degree of monetary policy stimulus that had been put in place over the past two years. There was mounting evidence that monetary policy was supporting activity in interestsensitive sectors and asset values’’.
‘‘Nationally, dwelling prices were above their late 2010 peak, with prices over the three months to October increasing significantly in Sydney. Housing turnover and loan approvals had picked up. Improved conditions in the established housing market were providing an impetus to dwelling investment, with residential building approvals increasing over the year.’’ This an expected development from the low level of interest rates and something the Board is hoping will spur on wider domestic activity.
It was noted that ‘‘the Australian dollar, while below its level earlier in the year, remained uncomfortably high’’ and that a lower level of the exchange rate would likely be needed to achieve balanced growth in the economy.
No doubt the strategy of maintaining an eas- ing bias is partly motivated by the need to ‘‘talk down’’ the AUD.
The Bank’s forecast for growth appears to be predicated on the current housing story flowing through to consumer spending. This is unlikely to materialise until consumers become much more comfortable with their job security, Westpac says.
The Bank lowered its growth forecast for 2014 from 3 per cent (trend) to 2.5 per cent (below trend) due to less investment.
The Bank has noted the recent strength in consumer and business confidence as well as the upswing in house prices and dwelling approvals. However, there are clear question marks on the sustainability of this upswing and if it can be maintained into 2014 given the downbeat outlook for non-residential construction; an expectation for a rising unemployment rate; the slowdown in mining; weak government spending; and the drag on our external sector from the high dollar.
The RBA is looking for the wealth/employment/confidence boost from the housing upswing to feed into the weak area of the economy. ‘‘It is our view that the pass through will be slow and uneven, requiring further monetary stimulus in 2014. It is our view, that two further cuts in the cash rate will be required in 2014,’’ Westpac says.