UBS Says RBA Could Be Done With Cuts And Will Raise Rates To 3% Next Year

Australian economists have lowered their expectations of another Reserve Bank rate cut, with the cash rate at a historic low of 2.5% and the economy showing signs of improvement.

In a research note today, UBS economists Scott Haslem and George Tharenou said there was a “better than even chance that the RBA’s made its last cut”.

The UBS note comes after Westpac and NAB earlier this week pushed back their November forecasts of another 25bps rate cut to February 2014.

UBS said the record-low 2.5% – which was set in August – was already redirecting household savings from savings accounts and mortgage repayments to riskier investments like real estate.

Households’ desire to repay debt have now reached the lowest level since 2007, UBS said. From today’s report:

And although unemployment figures are on the rise, Australians have become less worried about losing their jobs, UBS found, suggesting that their renewed optimism could drive consumer consumption up.

Here’s what Haslem and Tharenou expect:

We expect the RBA to hold for several months, absent a sharp rise in unemployment, as they assess the impact of recent easier financial conditions, particularly into end-13, post the election.

We still see a better than even chance the RBA’s made its last cut. The lagged effect of lower rates & a lower AUD, should underpin a steadying in business conditions and the jobs market, preventing unemployment breaching 6%.

The likelihood of Fed tapering (now seen Q1 2014) pushing the AUD lower, and an improving global economy, should contribute to some stabilisation in the economy. Of course, absent some improvement soon, the RBA will likely have further work to do.

We forecast a Q4 2014 start to the RBA rate hike cycle, with two hikes taking the cash rate to 3%, as the RBA starts normalising. Like the risk the RBA has more easing to do near-term, there’s a risk hikes don’t start until 2015.

Now read: The Demise Of The Australian Economy Has Once Again Been Greatly Exaggerated

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