ANZ predicts RBA will cut interest rates to 1.5%

24 September 2015| Clancy Yeates| Sydney Morning Herald

http://www.smh.com.au/business/banking-and-finance/anz-predicts-rba-will-cut-interest-rates-to-15-20150924-gju1vi.html

ANZ Bank economists expect the Reserve Bank to cut official interest rates to a new record low of 1.5 per cent next year in response to a worsening global economy and stubbornly high unemployment.ANZ economists Warren Hogan and Justin Fabo on Thursday argued that the extra support would be needed to boost an economy still suffering from a plunge in mining investment.

“We now expect the RBA to cut the cash rate by a further 50 basis points next year, taking the cash rate to 1.50 per cent,” they said.

“Pinpointing the timing of the cuts is tricky, but we are pencilling in 25 basis point cuts in February and May at this stage.”

Previously, the bank’s economists had forecast the RBA had finished cutting rates and would keep interest rates on hold at 2 per cent throughout the rest of this year and 2016.

An official cash rate of 1.5 per cent would be the lowest ever seen since the RBA was given the power to set monetary policy independently of the government.

Forecasts downgraded

The change in view comes after ANZ’s economists recently downgraded their growth forecasts for the world economy, due to weakness in emerging markets.

“Risks to growth in Australia’s major trading partners in Asia, and Australia’s terms of trade, are skewed to the downside, with China in particular facing several significant challenges,” the economists said.

At the same time, they argued the domestic economy would next year receive less support from the housing market and the lower Aussie dollar.

“[RBA] Governor Stevens has previously noted that growth in the non-mining economy needs to be above average for a couple of years to eat into spare capacity – at best it is currently around average with little prospect of improving much in our view. At the same time, mining investment has much further to fall,” they said.

The economists argued that with such a weak economic backdrop, it was difficult to see how “inroads” could be made into the unemployment rate – currently at 6.2 per cent.

“The economic backdrop we have outlined above points to greater risk that unemployment worsens rather than improves over the next 12-24 months. Governor Stevens’ ‘path of least regret’ suggests he will need to cut rates again,” they said.

The change in view means ANZ has joined a relatively small group of foreign market commentators in predicting the RBA will cut interest rates to 1.5 per cent next year.

The median forecast among market economists is that official interest rates will stay on hold at 2 per cent for the next year, according to recent data from Bloomberg.