SMH 16-07-11: THE collapse in consumer sentiment and increasing risk of a European sovereign debt default have prompted Australia’s second-biggest bank to forecast the Reserve Bank will cut interest rates by one percentage point by the end of September 2012.
Interest rates were “too high” given the weakness in non-mining parts of the economy, according to the chief economist at Westpac, Bill Evans, who predicted the Reserve would deliver moribund consumers a cut of one quarter of a percentage point at its December meeting. Further three-month instalments of 0.25 percentage point cuts would follow, he predicted.
“While the catalyst for the first rate cut is likely to come from offshore, we do not expect it to be a one-off,” he said. “Interest rates are too high in Australia given the state of the non-mining sectors of the domestic economy and a downward adjustment is required to avert a damaging round of contraction.”
Australian shares fell for a second day as investors continued to punish retail stocks, including David Jones, which shocked the market on Thursday with a profit downgrade. But yesterday the cashed up-mining giant BHP Billiton revealed it has sealed a $15 billion takeover of the US shale-gas and liquids company Petrohawk.
This deepening divide between the mining and non-mining sectors was highlighted in detailed job figures, which reveal NSW’s coal-laden Hunter Valley was home to the lowest jobless rate in the country last month, at 1.5 per cent, while Queensland’s tourism-dependent region around Hervey Bay had the highest, at 10.6 per cent.
Meanwhile the vicious confrontation between US legislators over raising their government’s debt ceiling from $US14.3 trillion ($13.3 trillion) has prompted renewed fears the world’s biggest economy will default on its debt payments.
European Union leaders also held emergency talks last night to break the cycle of fear and anxiety which has gripped global markets.
A Westpac survey of consumers, released this week, found a dramatic fall in confidence. Further findings released yesterday show 26 per cent of people expect house prices to fall over the next year, up from 17 per cent three months ago.
“Housing is the major component of household wealth,” Mr Evans said. “Fears about falling wealth are likely to spur further increases in the savings rate.”
A percentage-point rate cut would save a household with a mortgage of $300,000 more than $200 a month.
The Australian dollar dropped half a US cent after Westpac issued its revised forecast. A Bloomberg survey found 18 of 21 interest rate strategists expect at least one rise by the end of the year. The other two expect rates will remain on hold, while Westpac predicted a cut.
The Reserve has warned of the inflationary pressures of the mining boom. An economist at Commonwealth Bank, John Peters, said the bank expected the Reserve would lift rates by one percentage point over the next two years.
“We certainly think that growth is going to pick up even though the consumer is pretty comatosed at the moment,” he said.
If the cash rate did fall to 3.75 per cent, this would undo half of the rate rises by the Reserve since the depth of the financial crisis.