Certainty of August rate cut dims as economists home in on 3% cash rate forecast by June 2013

Markedly fewer economists expect the Reserve Bank to cut interest rates in August following last week’s decision to keep the cash rate unchanged at 3.5% at the July 3 meeting.

Of the 25 economists surveyed by Bloomberg on July 6, just over half – 13 out of 25 – expect the RBA to cut rates on August 7.

This compared with more than two-thirds of economists (19 out 28) surveyed a week before the July 3 meeting who said the RBA would cut rates on August 7.

Among the four major banks, ANZ has shifted from expecting a rate cut in August to now anticipating rates to remain on hold. The three other major banks continue to expect the RBA to cut the cash rate in August.

The RBA monetary policy decision statement of July 3 appears to have created more uncertainty about an August rate cut.

The statement noted a “more subdued international outlook than was the case a few months ago” and said that the local economy “continued to grow in the first part of 2012, at a pace somewhat stronger than had been earlier indicated”.

It noted, however, that housing remained “subdued”.

The June statement – following the 25-basis-point cut in June – spoke of a “more uncertain international environment”, deteriorating financial market sentiment and declining house prices.

Looking beyond August, the picture is cloudier about where interest rates may be heading.

The median expectation among the 25 economists survey by Bloomberg is for just one more rate cut over the next 12 months to a cash rate of 3.25%.

However, there is a wide divergence of opinion, with a forecast range from 2.5% to 4% by the end of the financial year. Of the 25 economists surveyed, 13 expect the cash rate setting to be 3.25%, which would mean just one more rate cut.

Westpac is still forecasting a cash rate of 2.75% by year end. According to Westpac chief economist Bill Evans, a cash rate of 2.75%  would mean an average standard variable mortgage rate of between 6.05% and 6.5%, given the current gap in the cash rate and bank mortgage rates.

There is even wider divergence among economists polled by Bloomberg after June 2013. While the median remains at 3.25%, just five economists are forecasting this to be the cash rate, with forecasts ranging from a cash rate of 2.5% to 4.5%.

A separate Saturday Age survey of 22 economists compiled by Tim Colebatch forecasts an average cash rate of 3% by June 2013, equating to two 25-basis-point rate cuts.

Out of the 22 economists polled, 12, expect a cash rate of 3.25% by the end of the financial year, a view held by noted chief economists Alan Oster (NAB), Shane Oliver (AMP Capital) and Paul Bloxham (HSBC).

By far the most bearish is Neville Norman, associate professor in the department of economics at Melbourne University, who forecasts the cash rate to rise to 4.5% by year end.

Forecast of 22 economists polled by Saturday Age:

2.75% Burchell Wilson (ACCI), Des Moore (Institute for Private Enterprise), Andrew Hanlan (Westpac), Julie Toth (Australian Industry Group), Tom Kennedy (JP Morgan)

3% Brad Crofts (Australian Workers Union), Richard Gibbs (Macquarie Bank), Peter Jones (MBA)

3.25% Saul Eslake (Bank of America Merrill Lynch), Richard Robinson (BIS Shrapnel), Chris Caton (BT Financial Group), Michael Workman (CBA),  Andrew Boak (Goldman Sachs Australia), Andrew Harvey (HIA), Paul Bloxham (HSBC), Alan Oster (NAB), Hans Kunnen (St.George), Annette Beacher (TD Securities),

3.5% Jakob Madsen (Monash University)

4.5% Neville Norman (Melbourne University)