Economist extends cash rate forecast

One industry economist has changed his forecast that the Reserve Bank will reduce the cash rate to 1.5 per cent by the end of the year, but is sticking by his call on the Australian dollar.

BetaShares chief economist David Bassanese said he still expects the RBA to cut the cash rate to 1.5 per cent, but is now not expecting that to happen until June 2016.

Mr Bassanese said the failure of the unemployment rate to rise further has not gone unnoticed by the RBA, and has led it to question its previous assumption about what it considers the appropriate ‘trend’ growth benchmark for the economy.

“Irrespective of whether trend growth has fallen or not, for policy purposes, the bottom line is this: in an environment of uncertainty over ‘trend’ economic growth, the RBA can be expected to be less proactive in setting policy according to growth indicators, and more reactive to trends in the actual rate of unemployment,” he said.

“As a result, another interest rate cut by the RBA now appears unlikely anytime soon – and certainly not before we see a clear resumption of the previous upward trend in the unemployment rate.”

Mr Bassanese said the next “window of opportunity” for a rate cut is the central bank’s November policy meeting.

“There will be three more employment reports before the November policy meeting. If these reports show the unemployment rate lurching toward 6.5 per cent or more, there remains a very good chance the RBA will feel obliged to cut interest rates in November,” he said.

Mr Bassanese said his prediction that the Australian dollar will be at US$0.68 cents the end of 2015 remains on track, with the recent decline in the dollar to around US$0.73 cents placing it broadly at “fair value” – assuming a further one per cent decline in terms of trade in the June quarter.

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