A weakening economy will force the Reserve Bank of Australia to cut interest rates three times this year to the uncharted territory of 0.75%, according to a leading economist.
Westpac’s widely respected senior economist, Bill Evans, said on Friday he now believed the central bank – faced with anaemic GDP growth, falling house prices and rising unemployment – would go further than previously expected as it cut rates from the long-standing record low of 1.5%.
Evans believes the RBA will announce a cut of 0.25 percentage points at its next meeting on 4 June, followed by another similar one in August and then another in November.
His prediction was followed by a 0.3% fall in the Australian dollar, which was at US$68.88 at lunchtime on Friday. The ASX200 was down 0.6%.
Westpac's June, August, November #RBA rate cut call is spot on. His Holiness Bill Evans leading the way. Take note #ausbiz #ausecon
— James Glynn (@JamesGlynnWSJ) May 24, 2019
A rate cut in June now appears to be a near-certainty with Bloomberg’s survey of economists unanimous in believing the RBA will act.
Although Evans sees the cash rate staying at 0.75% throughout 2020, he did not rule out a further cut to take base borrowing costs to 0.5%.
According to @BloombergAU survey it's unanimous the #RBA will ease policy at its June meeting with August favoured for the follow up cut, @WestpacMacro the only shop calling the cash rate below 1%, some sympathy for the view as I don't believe 50bp will be enough #ausbiz pic.twitter.com/GKLfhEPO34
— Alex Joiner (@IFM_Economist) May 24, 2019
He even suggested that the RBA might need to embark on a program of quantitative easing, or asset purchases, such as the schemes adopted in the US, UK, Europe and Japan after the global financial crisis.
“Our forecasts for employment; wages growth; economic growth; inflation and conditions in the housing market are consistent with the need for policy to ease through the full course of 2019,” he said.
“We see the unemployment rate drifting up to 5.4% by year’s end; economic growth at 2.2% for 2019 ; underlying inflation at 1.4%; and the housing market still weak although approaching stability.
“Our central forecast for the terminal cash rate in this cycle is 0.75% with risks to the downside.
“We would certainly see 0.5% as the floor for the cash rate, with QE [quantitative easing] a more effective policy tool thereafter.”
For the rate to stay at 0.75%, Evans said the housing market would have to stabilise and there would need to be a sustained confidence boost from a stable federal government in a position to embrace genuine reform.
He said the terms of trade would also have to hold up much better than assumed in budget estimates, and that global trade tensions would have to ease.
