Westpac's Bill Evans Says The RBA Will Cut Rates To 2% In 2015

The rush to call a rate cut from the RBA in 2015 continues apace with Westpac’s chief economist Bill Evans formally changing the bank’s call on RBA rates yesterday.

Evans said that Westpac now expected the RBA to cut rates twice in February and then again in March 2015 taking official rates to 2%. He says this is in order to take out “insurance” on the economy “in an effort to bolster domestic demand and lower the AUD before evidence on the world economy becomes clearer around the middle of the year”.

Here’s the thinking behind the change in call.

Our initial response to the September quarter national accounts was that the Reserve Bank would accept that the dismal growth profile was due to a lumpy fall in government spending; a temporary pause in the dwelling investment upswing; a sharper than expected drop in mining investment; and the fall in the terms of trade, which was already known to the policy makers.

However on reflection we think that the weakness in the accounts – including falling inflation; contracting national incomes; and a loss in growth momentum – coupled with further sharp falls in commodity prices, continued weakness in consumer sentiment – which has failed to recover from its post-Budget fall – and the prospect of a further significant negative shock to confidence will be enough to prompt the RBA to use some of their remaining policy ‘scope’ and lower rates further.

Evans couched his call a little by saying that much can happen between now and February and he still thinks that rates will rise again in 2016. But this is a big move from one of Australia’s big four banks and one of our most senior economists.

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