Pressure Builds on RBA to Cut Again as Westpac up Rates

Westpac’s surprise lift in home loan rates has made a cut in official interest rates by the Reserve Bank of Australia as early as next month “highly likely”, says Goldman Sachs, adding further easing early next year was also probable.

Goldman Sachs’ Australian economist Tim Toohey said on Wednesday a 25 basis point cut to the cash rate, to 1.75 per cent, at the RBA’s November meeting was now “highly likely” and a “strong case for a further rate cut in early 2016” could also be made, while other economists and analysts also adjusted their outlook for monetary policy.

Mr Toohey said two major events had prompted a change in the US investment bank’s forecast for monetary policy in Australia, which would see the cash rate falling to 1.5 per cent.

The first is Westpac’s surprise mortgage rate rise which he said made it highly likely the other three major banks “will all soon follow suit”. The second reason for Goldman’s more dovish stance is a sharply increased risk of a severe drought in Australia.

“With the recent drought stripping between 50-100 basis points from economic growth, the risks to our bottom of consensus forecast of 2.0 per cent GDP growth in 2016 remain to the downside,” Mr Toohey said.

The combination of preemptive independent interest rate hikes by the banking system and the emergence of a new and significant threat to Australia’s economic growth comes at a particularly uncomfortable time in Australia’s economic cycle, Mr Toohey added.

He said financial conditions were at a similar level to where the RBA eased policy in February and May 2015, while momentum in the non-mining economy appeared to have slowed.

“Higher mortgage rates will tighten financial conditions further, in the absence of an offsetting rate cut by the RBA and can be expected to further slow underlying activity growth into 2016 when combined with the emergence of drought conditions,” he said.

Australia Financial Review

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