Banks tip further cuts

A PESSIMISTIC outlook for the economy has the National Australia Bank joining ANZ in slashing its interest rate forecasts for the year.

Economists from NAB on Friday were tipping three more interest rate cuts this year, taking the Reserve Bank's rate from 3 per cent to 2.25 per cent by the September quarter. The bank's data and business surveys are pointing to a weakening economy and it is tipping there would be a noticeable rise in the unemployment rate to about 5.75 per cent by late this year.

"The last time we put out an official forecast was in the first week of December, and we were [forecasting] one cut. What we're basically saying is that what we are seeing says to us that we weren't sufficiently bearish," NAB's group chief economist, Alan Oster, said.

The gloomy outlook came even amid growing optimism of some recovery in the global economy with exports from Asian power China rebounding while Europe is starting to show signs of stabilising. This change of mood helped push the Australian dollar briefly above $US1.06 on Friday morning.

Even so, ANZ, which in December tipped the cash rate to be cut to 2 per cent this year, said on Friday it was pushing back its first forecast rate cut for 2013 from February to March, amid improving financial market sentiment, strengthening commodity prices and some positivity in recent economic data.

Westpac forecasts the Reserve Bank to cut rates by 25 points for year, while the Commonwealth Bank expects rates to remain at 3 per cent.

At the same time, financial markets expect there will be a one-in-three chance the Reserve Bank would cut rates to 2.5 per cent by the end of this year, Credit Suisse data showed.

Overnight, European Central Bank President Mario Draghi said the eurozone economy would return to health this year and that there was a "positive contagion", following the ECB's decision to keep its benchmark interest rate at 0.75 per cent.

Mr Oster said preliminary versions of a full quarterly survey showed that in sectors which were already struggling, such as manufacturing, discretionary retail and construction, "the smaller you are the worse you are, so there's a cash flow issue there".

While the mining sector was expected to improve in December as iron ore prices soared, he did not expect a big surge in new investment.

Commonwealth Bank senior economist Michael Workman said the RBA's settings were "very stimulative" to households and businesses.

"The barrier here is that neither of those two groups feel very confident, and that's clear in the surveys. So that's making them overly cautious on their cash flow positions and saving rates," Mr Workman said.

He said confidence would pick up in the second half of this year if there was further progress in China's growth and on the sharemarket.

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