Making a surprise readjustment to its outlook, Deutsche Bank says it now expects the RBA (Reserve Bank of Australia) to cut interest rates next year by as much as 0.5 percentage points.
It bases this call on a deterioration in employment and declining activity in housing.
Most market economists are forecasting a tightening in monetary policy, and a small rise in rates, sometime late in 2015.
However, Deutsche Bank today told clients it now expects a 0.25 percentage point cut in late Q2 2015, followed by another 0.25 easing in late Q3 or early Q4 2015.
This would bring the official cash rate to 2%.
Deutsche Bank had, until now, been forecasting the cash rate to remain unchanged at 2.5% all through 2014, 2015 and half way through 2016.
“We have in recent months been highlighting the risk of lower interest rates in 2015,” Deutsche Bank told clients today in a note.
Adam Boyton, the Chief Economist at Deutsche Bank Australia, expects the unemployment rate to peak at 6.75%.
This, he says, would ordinarily be consistent with an interest rate reduction.
“We expect the unemployment rate to rise on account of below potential real GDP growth, a sizeable decline in the terms of trade, and the capital intensive nature of GDP growth driven in considerable part by mining and energy exports,” he says.
“What has prevented us, until now, from actually forecasting rate cuts has been the strength in the housing market – in particular house price growth and the degree of investor activity.”
However, the RBA and APRA (Australian Prudential Regulation Authority) have signalled that measures will be introduced before the end of the year to ensure that the quality of lending to investors remains high.
While authorities have stressed that any such measures will not be designed to restrict the quantity of lending, Deutsche Bank expects that any lift in investment lending standards will tilt the balance a little in favour of owner occupiers.
“On the price side, it appears that house price growth across a range of sources is moderating from levels seen late last year,” he says.
An interest rate cut will place additional cash in the hands of consumers, who are currently seeing zero real wages growth, and lift both sentiment and consumption.
“It should also prolong an increase in housing construction activity,” he says.