MARKETS SPECTATOR: Goldman's rates tip

Goldman Sachs predicts a Reserve Bank interest rate cut next month and an even lower cash rate by November.

Despite government economic stimulus measures, favourable weather conditions, record low interest rates and wealth gains the disappointing economic numbers will push the Reserve Bank of Australia to cut its benchmark cash rate to 2.5 per cent next month, says Goldman Sachs analyst Tim Toohey.

Australia’s gross domestic product in the three months to March 31 rose 0.6 per cent compared with Toohey’s forecast of 0.8 per cent and a Bloomberg consensus forecast of 0.7 per cent.

“With consumer sentiment declining, falling back to August 2012 levels, and signs that labour market conditions have deteriorated further, it is likely that the Reserve Bank will be disappointed with the tone of the economic data,” says Toohey. “It is likely that GDP growth will be closer to 2.25 per cent year-on-year in June compared to the recent 2.5 per cent year on year forecast by the Reserve Bank. The risks of a sooner and sharper decline in mining investment continues to threaten the economic outlook into 2014.”

Goldman Sachs expects the bank to cut its cash rate by 25 basis points at its board meeting next month. By November the central bank will have cut the cash rate a further 25 basis points to 2.25 per cent, the company predicts.

“Depending on the response of the Australian dollar, additional easing may still be required in early 2014,” says Toohey.

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