Friday, July 15, 2011
"We now expect a sequence of rate cuts beginning with 25bps in December 2011
and through 2012 totalling 100bps prior to a period of steady rates in
While the catalyst for the first rate cut is likely to come from offshore
we do not expect it to be a one off. 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. This rate adjustment is likely to take a similar form to
previous easing cycles.
Whereas previous easing cycles had been associated with major collapses in
housing and business investment the key driver in this cycle is likely to
be an excessively weak consumer. We have lowered our growth profile for
consumer spending in 2011 from 2.6% to 1.2% and for 2012 from 2.8% to 2%.
With some associated dampening of housing and investment plans (outside
mining) growth in domestic demand has been revised down from 3.8% to 2.5%
in 2011 and from 4.5% to 2.7% in 2012.
The unemployment rate is expected to rise from 4.9% in June 2011 to
5.5-5.75% through 2012.
We have not made material adjustments to our expected profile for the AUD.
We already expect an 8–10 big figure fall in the AUD through to mid 2012.
Note that the first stage of the rate cycle we now envisage has recently
been priced into the market .
Modest changes in interest rate differentials are considered to be much
less important than our global growth view and the outlook for the USD.
Adjustments to those views are broadly offsetting. Heightened concerns
about the impact of financial market turmoil on global growth are largely
offset by our decision to "bring forward" the timing of QE3 in the US from
the second quarter of 2012 to the first quarter. That event (and its front
running by the markets) will have the AUD stronger than it would otherwise
have been if the RBA were easing unilaterally."
Westpac's New View