Weak economy, rate cuts ahead
By
Adam Smith
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18/08/2011 4:00:00 AM
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Sluggish economic growth may build a stronger case for an RBA rate cut, it has been claimed.
The Westpac-Melbourne Institute Leading Index has shown weakness ahead for the Australian economy. The index fell to 1.6% in June, below its long-term trend of 3%. Westpac chief economist Bill Evans said the index has seen steady decline from its peak of 9.5% in March 2010, and is now at its lowest since August 2009.
Evans commented that Westpac expects the below-trend economic growth to continue, hampered by weakness in consumer spending and the housing sector. He also predicted steady rises in unemployment throughout the first half of 2012.
In July, Westpac forecast 100bps of interest rate cuts by the RBA in the coming year, beginning with a 25bp cut in December. Evans said this prediction remains unchanged in light of the poor economic growth ahead.
"Despite extraordinary fluctuations in market pricing we are comfortable to maintain that view while recognising that a continuation of the global market uncertainty could force the RBA's hand to cut rates a little earlier than our original December target," Evans commented.
Evans pointed to the Reserve Bank's most recent Statement on Monetary Policy, saying it indicated the RBA still foresaw upside inflation risks.
"We expect that additional evidence that inflation risks have receded will be necessary before the Bank sees a case to cut rates," he said.
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