Big four banks divided on likelihood of March RBA cash rate cut

Borrowers risk a headache and frustration if they expect consensus from the major banks about the direction of interest rates in 2013.

Westpac chief economist Bill Evans is tipping one more rate cut in March; ANZ says possibly two rate cuts but maybe not in March; while the Commonwealth Bank’s Michael Blythe says there could be no more rate cuts in 2013.

NAB has yet to update its position, having forecast three more rate cuts last week when surveyed by Bloomberg.

The key issue appears to be how the non-mining sections of the economy will fare over the year and whether they will pick up the slack from the resources sector.

Inflation is expected to remain low throughout the year, providing scope for further rate cuts if they are needed.

In a note following yesterday’s decision, Bill Evans says there is “considerable encouragement in the [monetary policy] statement for our near term view that they will decide to cut rates by 25 basis points at the next meeting on March 5”.

Evans says the most important justification for this expectation is around the sentence in the final paragraph of the statement:

"The inflation outlook as assessed at present would afford scope to ease policy further should that be necessary to support demand."

“Our experience is that use of that word ‘scope’ in a forward sense indicates a decent chance that the bank will move at the next meeting,” says Evans.

He also points out that not much has changed in the domestic economy since the RBA last met in December, with “two extra months of low rates have not provided the board with much encouragement that things are turning”.

Evans notes the RBA’s “modest uplift in the assessment of the housing sector” but also fresh concerns around the outlook for employment growth and weak credit growth in both households and firms.

ANZ has moderated its expectations about further rate cuts.

Having previously forecast the cash rate to fall to 2% by year-end, ANZ says it is now “a little less confident about this call”, though the bank says its “expectations for employment growth and unemployment still suggest significant risk of at least two further rate cuts, even though the global picture appears to be improving”.

“Just as the mining boom kept Australia outperforming during recent years of global weakness, this effect will be a drag for Australia in coming years.

As for a March rate cut, ANZ appears to be hedging its bets at present and waiting for further data.

The bank says the RBA is “comfortably in assessment mode, waiting to see whether its policy easing to date is going to be sufficient to ensure enough of a pick-up in the non-mining sectors of the economy to offset the expected moderation in mining investment”.

“While the chances of a rate cut in March appear to have fallen somewhat, key to the near term path for the cash rate will be incoming labour market data and the outlook for non-mining investment,” says ANZ.

According to ANZ, the capex survey released on February 28 now takes on significant importance “given that it will include firms’ initial estimate of investment intentions for fiscal year 2013-14”.

The Commonwealth Bank’s Michael Blythe expects the cash rate to remain unchanged at 3% during 2013.

“Many of the forces that drove rates lower in 2012 have abated and the transition to non‑mining led growth is underway,” says Blythe.

However, he tempers this by saying that an easing bias “persists” and would be triggered by any stumble in the non‑mining economy.

“The RBA game plan during 2012 moved along the lines of providing some defence against global risks, moderating some of the pain imposed by a strong currency and fiscal consolidation, and getting the transition towards non mining led growth underway.  It may not be quite 'mission accomplished' but a lot of progress has been made,” says Blythe.

“The RBA notes that downside risks to global growth have ‘abated’, even if it is ‘for the moment at least’.

“Most importantly, growth in China has stabilized at ‘a fairly robust pace’ and commodity prices have ‘firmed’.

“Public spending is expected to be ‘constrained’ but the RBA has no doubt taken some comfort from the government’s decision to abandon the hard edged budget surplus commitment,” Blythe says.