Westpac: Here's Why The RBA Will Cut Rates

Getty/ Bill Pugliano

Yesterday Westpac released its latest consumer sentiment survey which showed that the pessimists still outnumber the optimists, with the index level of 93.2 still well below the long-run average.

From an economic outlook standpoint, in terms of retail sales and domestic growth, the really disappointing part of the survey was just how pessimistic respondents were about their finance now, in the next 12 months and the next 5 years.

Table: Westpac

Attempts to explain the pessimism, and the lack of follow through for confidence from the big fall in petrol prices, are made easier because Westpac quizzes survey participants about their unemployment expectations. While expectations that Australians will lose their jobs are down over the year at 150.7 it is still significantly higher than the 129.4 average (higher meaning people have a greater fear of losing their job).

Source: RBA Chart Pack

In many ways it’s the most powerful question in the survey as it gets to the heart of what consumers are feeling about their prospects for employment and thus their ability to cover costs of living. With such high debt levels in Australia it’s no wonder fear of unemployment elicits a powerfully pessimistic impact on Australian consumers.

If Australian are worried about losing their jobs then this is likely to be refelcted in their spending and saving within the domestic economy. Westpac says this has a powerful influence on the RBA cash rate and that the heightened level of fear surrounding unemployment sets the scene for a rate cut.

In his “Unemployment Expectations Chart Pack” Westpac senior economist Justin Smirk said:

The level of unemployment expectations remains high and, for now at least, the trend is rising which presents a disinflationary force on the economy. But what we have found is that it is the change in expectations, rather than the level, that is the more important guide to any possible change to the stance of monetary policy. The recent trend deterioration in expectations suggests that the possibility of a rate cut in early 2015 is much greater than some may think.

After the Bank of Canada cut last night local futures traders have increased the chances of a cut next month to 40%. Westpac argues it’s much higher.

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