Cash rate to fall 100 basis points to 2% in 2013: ANZ

ANZ is forecasting the Reserve Bank to cut the cash rate by a further 100 basis points over the course of 2013 to a rate of just 2%.

This would be the lowest the cash rate has been by some margin based on RBA data going back to 1959. The previous low, based on RBA proxy data (official cash rate settings began in August 1990) was 2.89% in January 1960.

Last week AMP Capital chief economist Shane Oliver forecast the cash rate to fall 2.5% in the first half of 2013, but said it could fall below 2% if there is slower than expected recovery in the non-mining sectors of the economy such as housing and retailing.

"Due to the further sharp weakening in mining business conditions in recent months, the tepid improvement in the non-mining sector, the deterioration in job advertising trends and the strong Australian dollar, we now expect a further 1 percentage point cut in the cash rate over the course of 2013," says ANZ as part of Australian Monthly Chartbook released today.

"This will help limit the prospective rise in the unemployment rate that job advertising is signalling. If realised, such rate moves will provide significant further support to the non-mining sectors, including the housing market."

In the latest chartbook, ANZ says the key issue for markets and policy makers is whether the weakest sectors of the economy (e.g. retail,housing, manufacturing and non-residential investment) strengthen sufficiently to offset the anticipated slowing in mining investment.

"The RBA’s two monetary easings in recent months, suggests the central bank wants some further insurance on this front. The related policy question is what further should (and can) be done if non-mining activity does not strengthen sufficiently. Backing away from the delivery of a budget surplus would be a start, while the RBA could consider moves to offset some of the negative effects of the strong flow of capital into Australia, thereby taking some pressure off the high Australian dollar," says ANZ.

The bank also notes that the RBA recently downgraded its mining investment forecast for 2012-13 to a little above 8% of GDP from around 9% of GDP.

"While this downgrade was substantial, the latest capex data suggest this forecast is now a ‘best case’ scenario with the 'low' CAPEX estimate around half a percentage point of GDP lower.

"This creates therisk that mining investment may now peak at an even lower level than previously forecast by the RBA,meaning that non-mining activity needs to pick up more sharply than before to maintain reasonable growth."