WESTPAC - Predicting the RBA to cut rates by 25bps on Dec 6

The Reserve Bank Board meets next week on December 6. Westpac has consistently argued that the current easing cycle which began on November 1 with a 25 bp rate cut will total around 100 bp's in rate cuts over its course.

On November 15 the Reserve Bank released the minutes of the November 1 meeting. Our analysis at the time was that there was considerable concern with respect to economic and financial developments in Europe and the potential impacts on the rest of the world, particularly Asia. The RBA’s opinion on the domestic economy had cooled significantly from earlier in the year and this was highlighted in significant reductions in their forecasts for economic growth and inflation over the forecast period which were released in the Statement on Monetary Policy on November 5.Westpac's own growth forecasts are lower for 2011 but broadly in line with the RBA's forecast for 2012 and 2013.At the time, we concluded that the Minutes indicated that there was scope for further rate cuts particularly with the Bank forecasting that underlying inflation would remain comfortably within the 2–3% band for both 2012 and 2013.  However we concluded that there was insufficient evidence to change our call that the next rate cut would be in February.

We emphasised that the decision on whether to bring the rate cut forward to December would depend on developments overseas, particularly in Europe and Asia.

Previous rate cut cycles have always featured an immediate follow up move but these have all begun from a much higher level with rates starting clearly in the contractionary zone. The Bank has assessed that the current setting of rates is around neutral so the decision to cut immediately after the first move is tougher.

To read the rest of the article go to:

http://www.westpac.com.au/docs/pdf/aw/economics-research/Offshore_Weekly.pdf