Rate drop becomes more likely

by Julia Corderoy09 Dec 2014
There is growing evidence that the next cash rate move may be downwards, as more economists change their cash rate predictions to forecast an interest rate cut in 2015. 

According to the finder.com.au Reserve Bank survey released prior to the Board’s final monetary policy meeting of the year last Tuesday, only three out of the 37 economists and industry experts surveyed forecast a cash rate cut next year. 

Now, five more have changed their prediction since the release of the survey, with eight out of the 37 respondents expecting interest rates to be slashed further to an unprecedented low next year. In the survey ahead of the November Board meeting, only one economist predicted a rate cut.

The revised sentiment comes off the back of sluggish economic growth. Last week, official figures revealed that Australia’s economy grew by just 0.3% in the September quarter, after a 0.5% increase in the June quarter. Growth is well below the previous economic forecasts of 0.7%.

Over the past year, the economy has grown by just 2.7% – below the decade-average growth rate of 2.8% and below the 15-year average of 3.0%.

The figures also revealed that real net national disposable income contracted for the second quarter in succession, which is the normal definition of a recession. In seasonally adjusted terms, real net national disposable income decreased by 0.3% in the September quarter.

The weak wage growth has then impacted on consumer spending. In November, the Westpac-Melbourne Institute Consumer Sentiment Index rose 1.9% – a modest rise, but still leaving sentiment at “cautiously pessimistic” levels. This prompted Treasurer Joe Hockey to emphasise the importance of consumer spending to support economic growth, encouraging Australians to go out and spend this Christmas.