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ANZ economists tip cash rate cuts to 2%

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AAP

December 17 2012, 2:04PM

(Reissuing to correct typo in second par.)

By Garry Shilson-Josling, AAP Economist

SYDNEY, Dec 17 AAP - ANZ's economists are predicting the cash rate will be cut to two per cent by the end of 2013 and suggest it may be a good idea for the government to step back from its budget surplus plans.

In a monthly report on Monday, they made the interest rate prediction based on weakness in the Australian economy and only a modest pickup in production in the rest of the world.

"Due to the further sharp weakening in mining business conditions in recent months, the tepid improvement in the non-mining sector, the deterioration in job advertising trends and the strong Australian dollar, we now expect a further one percentage point cut in the cash rate over the course of 2013," they said in the report.

Following a cut from 3.25 per cent earlier this month, the cash rate is now at three per cent, as low as it has been on a sustained basis since early 1960.

A move to two per cent would put it below a level seen in any available records.

Emphasising the novelty of this forecast, ANZ's chief economist Warren Hogan announced it though social media.

"ANZ Economics has changed our RBA forecast to 100bp (basis points) of rate cuts in 2013.

"We now expect the RBA to cut by 25 basis points in each quarter of next year," he tweeted late on Monday morning.

This marks the latest phase in a collective change of heart by financial market economists.

The first phase was initiated by Mr Hogan's counterpart at Westpac, Bill Evans a year and a half ago.

Before the July 2011 monetary policy meeting, all economists surveyed by AAP said they expected the Reserve Bank of Australia (RBA) to lift its benchmark cash rate to five per cent from 4.75 per cent by the end of 2011.

Later that month, on his return from a trip to Europe and worried by the dim prospects for a resolution of the euro zone's problems, Mr Evans took the plunge and called for a full percentage point of rate cuts in the coming year.

Those cuts were notched up in May this year and since extended by an additional 75 basis points (three quarters of a percentage point).

The cuts predicted by Mr Hogan and his team would mean a total of 275 basis points of cuts since the beginning of November 2011.

The big question was how the gap left by a fading mining sector might be filled.

"The key issue for markets and policy makers is whether the weakest sectors of the economy (eg retail, housing, manufacturing and non-residential investment) strengthen sufficiently to offset the anticipated slowing in mining investment," the ANZ report said.

The two interest rate cuts in recent months suggest the RBA wants to protect the economy against the possibility that the non-mining sectors remained too weak.

The related question was what should be done if those sectors remain sluggish.

A good start would be for the government to back away from trying to put the budget into surplus, the ANZ Research report said.

"If GDP (gross domestic product) growth slips below trend on a year-ended basis when the December quarter national accounts are released in early March, this would seem an opportune time for the government to change tack on its surplus commitment."