Westpac’s chief economist expects the interest rate set by the Reserve Bank will fall to its lowest level on record by the end of the year, predicting four rate cuts as the Treasury warns the budget surplus could be abandoned.
Westpac chief economist Bill Evans says the official rate will drop as low as 2.75% by Christmas and standard variable rates on mortgages would fall to about 6%.
“These two extra cuts are based on our assessment that the global environment – read Europe – has deteriorated even further since we revised down our call for the low point from 3.75% to 3.25%,” Evans said in a statement released last night.
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“In turn, this deterioration is expected to have a more severe impact on confidence in Australia than had earlier been expected.”
Evans expects 0.25-percentage-point reductions in June, July and August and one more by the end of the year in order to address the slowdown in the economy.
Paul Bloxham, chief economist at HSBC, told SmartCompany he is also expecting more rate cuts but he doesn’t think there will be four.
“Our view is that we think there are more cuts to come but we don’t think the Reserve Bank will need to go that far,” says Bloxham.
“The interest rate will get to 3.25% in the second half of the year on the back of the global risks at the moment, but overall we think the Australian economy has reasonably good prospects because unemployment rates are very low and the mining boom continues.”
Bloxham says growth is “below speed” but the RBA will hold rates steady next week.
The economists’ predictions on rate cuts come as figures show that while investment in mining remains strong, investment in other areas has stalled.
With investment stalling, Treasury secretary Martin Parkinson has raised the possibility of the Labor government abandoning its promise of a budget surplus if the European debt crisis sparks a renewed global recession.
Parkinson warned the Senate’s economics committee yesterday that the European crisis is “spiralling out of control” and that the Treasury department has been conducting intensive contingency planning for a new crisis since before last Christmas, according to The Australian.
“We could, if necessary, go back into deficit to support activity,” Parkinson said.
Here are three sectors that benefit from interest rate cuts:
Interest rate cuts are good for consumer confidence, which in turn is good for retailers.
The Australian Retailers Association has applauded previous rate cuts as providing more cash for consumers to spend, easing pressure on retailers.
2. Real Estate
The obvious winner from rates cuts is the real estate market, as long as the banks actually pass cuts on.
Lower interest rates should mean lower mortgages and more real estate buyers on the market.
However, Craig James, chief economist at CommSec, says something more than rate cuts will be required to help the housing industry.
“There is a crisis of confidence, with underlying housing demand reasonably solid; but home-owners, investors and developers haven’t got the confidence to build,” says James.
He is calling for a “comprehensive Australia-wide solution” for federal and state governments to kick start the housing sector.
Australia’s manufacturers are hanging by their nails and rate cuts could be a lifesaver for the struggling sector.
Activity in Australia’s manufacturing sector fell to its lowest level in nine months in May, but a reduction in interest rates would put downward pressure on the Australian dollar and this, in turn, would help manufacturers.
A lower Australian dollar makes manufacturing exports more attractive internationally and increases the cost of imports.