One of Australia’s biggest banks has predicted that the Reserve Bank would be forced to cut rates twice this year, bringing the official cash rate to a historic 1 per cent low.
Westpac chief economist Bill Evans today predicted that RBA would cut the cash rate by 25 basis points in August and then again in November because of a downturn in the economy.
Even further, he foreshadowed that any inaction on rates by RBA could see Westpac’s forecast 5-10 per cent property price drops in Sydney and Melbourne in 2019 go even further in 2020.
The major move comes in the wake of Westpac cutting GDP growth forecasts for both this year and 2020 from 2.6 per cent to 2.2 per cent, which was expected to trigger higher unemployment to 5.5 per cent by the end of this year.
“That makes a strong case for official rate cuts to cushion the downturn and, in turn, meet the RBA’s medium term objectives,” he said in his latest report on the market.
Mr Evans said even through RBA had revised its growth forecasts down from 3.25 per cent to 3 per cent for 2019 and 3 per cent to 2.75 per cent for 2020, “momentum in 2018 slowed dramatically”.
“Westpac’s growth forecast in 2019 and 2020 has been a much weaker 2.6 per cent in each year but even that number now appears too high. Our new forecast for GDP growth in 2019 and 2020 is 2.2 per cent.”
Westpac had “consistently held (since the August 2016 rate cut) the line that the RBA cash rate would remain on hold for the foreseeable future (a standard two-three year window)”.
“To an extent this view was influenced by the perception that the Bank welcomed the adjustment in the housing markets and saw insignificant spill over effects to the rest of the economy,” Mr Evans said. “The recent change of rhetoric from the Bank on that issue is important. Our revised growth, inflation and unemployment forecasts now make a convincing case for lower rates.”
Among headwinds facing the country, the housing downturn was expected to spill over into consumer confidence and construction activity, but it would also have to face the challenge of tougher lending via “developments around credit”.
MORE: Yacht racing millionaire’s $3m discount
Champion hurdler Sally Pearson sells Gold Coast home in a matter of days
Foreign buyer retreat nationally, but not QLD
Westpac believed “the need to restore affordability and the impact of tighter lending standards on prices” would see property prices fall by around 5-10 per cent in Sydney and Melbourne this year.
“Absent any policy response from the RBA we expect that further falls will be necessary in 2020 before stability in these markets will be achieved.”
Mr Evans said the new lending for housing correction in the second half of 2018 was “sharper” than Westpac had anticipated, down 14.9 per cent with both investors (-15.5 per cent) and owner occupiers (-14.7 per cent) affected.
“These falls are a combination of both demand (concerns around falling prices and stretched affordability) and supply (new regulations and caution from some lenders in a falling market). We expect these falls, albeit at a much slower pace, to continue through 2019 representing a negative feedback loop to prices.”
Westpac has also revised its residential housing construction forecast further downwards for 2019 to –10 per cent from –7 per cent, and –5 per cent in 2020 from –3 per cent predicted earlier.
FOLLOW SOPHIE FOSTER ON FACEBOOK