Finance Finance News Rates to go as low as 0.50 per cent: Leading economist

Rates to go as low as 0.50 per cent: Leading economist

A sluggish global economy is creating more pressure for further rate cuts. Photo: Getty
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A week after one economist declares Australia’s economy is on the mend, another comes out forecasting more gloom.

On the bright side, that gloom will mean further interest rate cuts, shaving dollars off mortgage payments and boosting the Australian economy.

Westpac chief economist Bill Evans has caused a bit of a stir by revising his forecast for the official cash rate and becoming the first economist for a major bank to predict the cash rate to hit 0.50 per cent.

And the economy is so sluggish and its recovery so urgent that Mr Evans also revised the timing of the next rate cut.

“We are bringing forward the timing of our forecast for the next cut in the overnight cash rate by the RBA from November to October,” he said in his latest briefing note.

“We are also revising down our terminal rate forecast from the 0.75 per cent we forecast on May 24 to 0.50 per cent. We expect the move from 0.75 per cent to 0.50 per cent to occur in February next year.”

Mr Evans, the only economist from the big four banks to predict the rate to go to 0.50 per cent, said the bank believed employment would not rise by as much as the Reserve Bank (RBA) target, giving the RBA “appropriate justification to ease policy a little earlier than we had previously expected”.

The RBA has already chopped the cash rate twice since June to 1 per cent to try and breathe life into the economy and get inflation back to its target of 2-3 per cent.

Mr Evans’ projection comes just a week after independent economist Stephen Koukoulas told The New Daily the economy may have hit its low point and was “poised to enjoy some sunshine”.

“For now, the economy is negotiating the low point in the current cycle and there are growing reasons to be optimistic that by year end, the gloom will have passed and the economy will be on track to return to what will be truly strong growth,” Mr Koukoulas said.

Meanwhile, senior economist with AMP Capital Diana Mousina said AMP had predicted before the June rate cut that the cash rate would go to 0.50 per cent, with cuts in November and early 2020.

“With the continued weakening in the economy and the RBA saying it had revised the NAIRU [non-accelerating inflation rate of unemployment] to 4.5 per cent, that indicated to us that they would need to cut well below where the cash rate was,” Ms Mousina said.

AMP predicts unemployment to go to 5.5 per cent by the end of 2019, and doesn’t see it going below 5 per cent again.

Ms Mousina said while AMP saw the second half of 2019 being a little stronger with tax cuts, rate cuts and a weaker Australian dollar, “we don’t see inflation rising significantly from its current level”. And that would prompt further cuts.

The only thing that may stave off further cuts is a significant strengthening in the global economy, Ms Mousina said.

In a survey of 20 leading economists by The Conversation in June, 13 expected Australia to have a cash rate of 1 per cent by the end of the year. Only four expected a rate of 0.75 per cent or lower.

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