Westpac has pushed its rate cut forecasts back three months on comments made by RBA governor Glenn Stevens in a rare media interview.
Stevens spoke with the Wall Street Journal and Australian Financial Review last week in what many, including HSBC chief economist Paul Bloxham, described as an attempt to “jawbone” the AUD lower.
In a note to clients today, Westpac chief economist Bill Evans said the AFR interview “indicates quite clearly that [Stevens] is in no mood for a Febuary rate cut”.
Westpac is now expecting Australia’s cash rate to fall from today’s record low of 2.5% to 2.25% in June 2014 and 2% in September – three months later from its original forecasts of cuts in February and May.
Evans, who Bloomberg named as Australia’s most accurate economist this year, highlighted Stevens’ comments about a strong housing market, flat non-mining investment, and confidence lift as reasons for delaying any rate cuts.
From Evans’ note:
The Governor accepts the need for further stimulus in the Australian economy but he is focussed on providing that stimulus through a weaker Australian dollar rather than lower rates.
Uncertainty around the residential property market is seen to be the primary constraint on using interest rates. It has been, and continues to be, our view that such an unconventional approach to policy will eventually prove to be unsuccessful.
The Australian dollar is likely to remain comfortably above the soft ‘target level’ of USD 0.85 and even with a lower dollar, the core weaknesses in the Australian economy should persist.
We hold the view that with the RBA forecasting growth to be 2.25% in 2013; 2.5% in 2014 (both below trend) and a gapingly wide range for 2015: 2.75% to 4.25% there is a case for more conventional stimulus.
We can see from the Governor’s current position that it is not going to be acted on in the near term.
Overall the need to assess whether a credit fuelled property boom emerges; await the ‘fate’ of the AUD; and track residential construction points to the Bank delaying the next rate cut until later in 2014.
However we strongly defend our view that ongoing reluctance of business to invest and employ will ensure further weakness in the labour market which will weigh on household spending; contain any excesses in the housing market and signal the need for even lower rates over the course of 2014.