Westpac: The RBA Won't Cut Because Consumer And Housing Momentum Is Too Strong

Getty/Shaun Botterill

Australian interest rate traders moved to start to price in an RBA rate cut last week after the combination of weaker-than-expected retail sales and a warning from RBA governor Glenn Stevens on the impact of the high Aussie dollar.

But Bill Evans, Westpac’s chief economist, says there is no reason for the RBA to cut based on current evidence.

Evans says:

We expect that the negative impact of the Budget on confidence and spending will ease as we move through 2014. Strong fundamentals around a high savings rate and a large wealth effect ($700bn lift in 2013) are likely to underpin a lift in the consumer in the second half of 2014. Further, there is considerable opposition to some of the more unpopular Budget initiatives in the new Senate, potentially indicating some compromise.

The momentum in housing has eased in recent months. In Fig 2 we note that momentum in house prices has only been significantly arrested in previous cycles with a rate hike. With rates on hold (from our perspective) until late in 2015 there appears to be scope for at least maintaining current momentum in housing.

Note that the market has already received a “rate cut” in 2014 with some banks reported to have increased discounting on new loans in recent months.

That might be true but the market is betting the cycle is different this time and of course that’s the point of market pricing – traders are balancing a changed skew in risks and the potential for a rate cut.

They aren’t saying there will be a rate cut. They are betting the chances have changed.

So Evans’ views and the market view are not inconsistent at the moment because he says with regard to the RBA that:

The Bank will be patient over the rest of 2014. It would only cut rates if the AUD remains around current levels and the consumer and housing slow sharply – eventually causing the Bank to lower its growth forecasts for 2015

…maintenance of these very low rates is likely to see a “recovery” in the momentum in consumer spending and, at least, a maintenance of housing momentum. Such a profile would preclude the possibility of lower rates.

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