Westpac joins fellow big four bank NAB in revising its forecast, with NAB predicting the Reserve Bank of Australi (RBA) will cut in either October or November.
In light of comments made by RBA Deputy Governor Guy Debelle on Tuesday, Westpac chief economist Bill Evans said he expected the central bank to cut.
"In a speech yesterday the Deputy Governor of the Reserve Bank gave a fairly clear hint that the Board is set to cut the cash rate and other key policy rates at its October Board meeting," Mr Evans said.
"The theme is likely to be, as we saw in March, a Team Australia moment where the Reserve Bank is directly supporting a bold Federal Budget.
"The prospect of the RBA “sitting back” to assess the Budget, which has been seen as the “norm” in previous years is not appropriate for these unique times."
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Addressing the Australian Industry Group yesterday, Dr Debelle said the central bank's support package could be altered to further assist the country out of recession.
"As the outlook for the Australian economy unfolds, the Board will continue to assess the merits of the range of monetary options to best support the economic recovery." Dr Debelle said.
While NAB economists have forecasted either an October or November rate cut, Mr Evans said there was no reason for the RBA to hold fire until later in the year.
"It is the medium term projection that the unemployment rate is still likely to be around 7% by the end of 2022 – the Deputy Governor refers to a 'slow grind' – and that the shortfall in demand will be 'a significant break on the recovery'," he said.
"That outlook is unlikely to change in the November forecast revisions, hence no real case can be made to 'wait'."
Mr Evans said Dr Debelle's speech demonstrated the RBA's concern for the outlook of the economy, and where previous speeches had put emphasis on fiscal stimulus, this speech had focussed mainly on RBA policy.
"He [Dr Debelle] notes that the Bank’s current forecast is that the unemployment rate will still be above 7% by the end of 2022," Mr Evans said.
"So, in the Bank’s current figuring, restoration of the full employment rate (which through wage pressures and the resulting required narrowing of the output gap is significant for achieving an inflation target) is in the far distant future.
"That means that policy needs to be very stimulatory."
Negative rates a possibility
Mr Evans noted while Dr Debelle ruled out negative interest rates, the central bank was in the position of potentially having to deal with a negative overnight rate.
"Banks, which lend at a margin above the overnight rate will still not be exposed to negative lending rates but this process may provide the RBA with a test of its comfort with negative rates," he said.
Although the official cash rate target currently sits at 0.25%, the RBA's alternative easing measures have pushed the interbank overnight cash rate down to 0.13%.
NAB revises its cash rate forecasts
In light of Dr Debelle's speech, NAB revised their cash rate forecast, predicting either an October or November rate cut.
While Mr Evans said there was no reason to wait, NAB economists said a November cut may appeal to more people.
"NAB expects these further easing measures to be announced at either the October or November Board meetings, noting that the October Board meeting is the same day as the Budget, while the November SMP (Statement on Monetary Policy) after the November Board could be an avenue to communicate its messaging to a wider audience," they said.
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