WESTPAC’S economists believe that any possibility that the Reserve Bank of Australia will cut rates later in the year hinges on the likely outlook, at that time, for growth in 2015.
Factors that will impact on that outlook will include the ongoing downturn in mining; fiscal consolidation; the impact of a fall in the terms of trade; and two important macro dynamics which, Westpac believes, the RBA is understating – the direct feedback effects on confidence and incomes of the weak labour market and ongoing caution among business and consumers.
Coomenting on the release of the minutes of the RBA’s last meeting, Westpac said the governor made it clear that policy had been moved to a neutral stance and these minutes confirmed that view.
There are a number of behavioural assumptions in the minutes.
Firstly it is assumed that the labour market will lag economic growth with feedback effects from employment to incomes and confidence tending to be overlooked. It is therefore assumed that the rise in house prices will prompt a marked lift in consumer spending through the wealth effect and therefore a reduction in the savings rate.
‘‘We tend to be more sceptical around that dynamic given the ongoing attitude of households since the Reserve Bank started to cut rates in November 2011,’’ Westpac said.