Majors revise rate forecasts as oil price bites

Market pricing is giving a one in four chance of an interest rate cut next week, but one major bank remains bullish.

Westpac’s view is that the case for lower rates is strong.

“The December Leading Index adds to this, showing growth momentum remains weak,” Westpac senior economist Matthew Hassan said in a research note yesterday.

“With commodity prices continuing to fall in 2015, incomes and confidence remain under pressure,” Mr Hassan said.

“We expect the December quarter inflation report due out later today will show sufficient scope for the RBA to cut rates, with a February move seen as more attractive for the Bank given that it coincides with a full Statement on Monetary Policy and a full revision to its forecasts,” he said.

Falling oil prices and a devaluing Aussie dollar have forced two major banks to revise their cash rate forecasts ahead of next week’s decision.

In another research note released yesterday, NAB Group chief economist Alan Oster said that while two rate cuts this year are still expected, their timing will be “very dependent” on data flow and “could start a touch later”.

Mr Oster said lower oil and other commodity prices will lead to cuts to national incomes and lower inflation in the short-term.

“Unemployment will continue to deteriorate but peak lower (6.6 per cent) and later (Q4 2015),” he said.

Meanwhile, ANZ chief economist Warren Hogan said the major bank has factored in two 25 basis point rate cuts over the first half of the year.

However, ANZ chief executive Mike Smith has urged the Reserve Bank to hold fire on interest rates and expressed confidence in the health of the Australian economy.

Speaking to BlueNotes on video yesterday, Mr Smith said while plunging commodity prices were having an effect, the declining Australian dollar was mitigating some of the damage.

“I think if I was the central bank I would wait and see how this plays out because if the currency can take most of the shock it’s a much better way to deal with it,” he said.

“And of course it does leave you the option of monetary policy later.”

Mr Smith said he still sees Australia as relatively well placed.

“I’m still not too worried by the Australian economy,” he said.

The Real Estate Institute of Australia (REIA) is now calling on the RBA to cut the cash rate following the release yesterday of the latest consumer price index figures. 

The December 2014 quarter CPI figures show the RBA’s underlying trend series measures of inflation continue to be well within its target zone.

REIA president Neville Sanders said this should translate into good news for home owners.

“In the December quarter, the CPI rose by 0.2 per cent and an annual rate of 1.7 per cent," Mr Sanders said.

"These figures are below the RBA’s target zone of 2-3 per cent and should not put pressure on the inflation outlook.

“The annual changes for the analytical series of trimmed mean and for the weighted median were 2.2 per cent and 2.3 per cent respectively and compared to the changes for the 12 months to the September quarter 2014 of 2.4 per cent for the trimmed mean and 2.3 per cent for the weighted median."

The housing group increased by 0.5 per cent for the December quarter which was the same as the September quarter and an annual rate of increase of 2.4 per cent.

The main increase in the December quarter for the housing group was for new dwelling purchases, which increased by 1.1 per cent.

Rents increased by 0.5 per cent for the quarter and 2.4 per cent for the year.

“With inflation under control combined with a slowdown in housing finance, it’s appropriate that the RBA board seriously considers a cut in interest rates at their meeting next week,” Mr Sanders said.

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