The next interest rate cut may not come until 2014

While some are predicting what has become a bit of a tradition – an interest rate cut on Melbourne Cup Day, the first Tuesday of November –  the chances of another interest rate cut this year are getting slimmer.

Recently two of Australia’s biggest banks altered their forecasts for the next cut…

Westpac now forecasts the Reserve Bank of Australia will reduce the cash rate twice more. Once by a quarter of a percentage point in February and then again May in 2014.

It had previously predicted cuts in November and February.

Also last week the National Australia Bank pushed out their forecast of a November rate cut to February.

The RBA’s cash rate is currently at a record low of 2.5 per cent after it made quarter of a percentage point cuts in May and August.

Westpac chief economist Bill Evans said improving consumer and business confidence means that a third rate cut this year would not be needed.

“The recent boosts to business and consumer confidence in anticipation of the expected election result raise the possibility of much more buoyant domestic demand in 2014 than our own forecast.”

RBA governor Glenn Stevens has expressed caution about that confidence data, indicating it was too soon to make a judgement about the overall economy based on those figures alone.

Mr Evans said that stance indicates the RBA is prepared to wait more information on the state of the economy before taking any further action.

NAB chief economist Alan Oster said recent statements by the RBA have led him to believe they will play a wait and see game.

With economic growth remaining at a below average pace, the RBA would normally be expected to be talking about the need to cut the cash rate, but that has not happened.

“For months, NAB’s view has been that the RBA would react to a softening economy ahead and come back with more monetary accommodation.
While this big picture story remains well and truly in place, the RBA’s recent statements have indicated that board members are comfortable enough with recent developments and there is no imminent interest rate cut coming.”

No rate increase till 2015

Both Mr Oster and Mr Evans say they do not expect the RBA to start increasing the cash rate until at least 2015 and looking at interest rate futures index it seems that market agrees.



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