Leading economists expect RBA to keep rates on hold

Economists appear to be coming to the conclusion that the Reserve Bank may leave the cash rate on hold at its next meeting on August 7.

Fifteen out of 25 economists polled by Bloomberg on July 20 – following the release of a more bullish July 3 monetary policy statement on July 19 – now expect the Reserve Bank to leave the cash rate unchanged at 3.5% in August.

This is up from 13 out of 24 economists who said the RBA would leave the cash rate unchanged when polled by Bloomberg on July 13.

Of the major banks, only the Commonwealth Bank is tipping the RBA to cut rates on August 7.

Noticeably, Westpac has pushed back its forecasting timetable of rate cuts by three months, with chief economist Bill Evans anticipating the next rate cut in October, having earlier forecast one in August.

Looking ahead to the end of the year, 12 out of 25 economists expect the cash rate to fall by 25 basis points to 3.25% with other forecasts ranging from 2.5% (Credit Suisse) to 3.5% (Barclays Capital).

In ANZ’s latest economics weekly wrap, ANZ’s head of Australian economics and property research, Ivan Colhoun, says the RBA Board’s July Minutes showed that the Bank saw growth momentum in the Australian economy to have been a little stronger than it had previously thought.

“This primarily reflected the surprisingly strong first quarter GDP data, which was released a day after its June policy meeting.

“The Minutes showed that the RBA felt that growth had slowed to around trend in the second quarter, while inflation pressures were said to remain contained.”

“In light of a ‘material’ easing in monetary policy since late 2011, which has led to a lowering in lending rates to 50 to 75 basis points below their medium-term average, the RBA appears to want to see how the economy responds to this loosening in monetary conditions.

“Hence, the RBA appears likely to sit on the sidelines for at least the next couple of months, assuming that the situation in Europe doesn’t deteriorate markedly in the meantime,” he says.

On Wednesday the second quarter CPI data (to June 2012) will be released by the ABS, and Colhoun says this will be “closely watched”.

“But we think even a low underlying inflation result, by itself, will probably not be enough to spur the RBA to lower the cash rate in August.”

“That said, it would increase the probability of further rate cuts down the track, and we still consider that further modest easing of 50 basis points will be forthcoming by the end of the year,” he says.

This article first appeared on Property Observer.

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