One rates cut to last the distance

Economists polled by Bloomberg expect the Reserve Bank to cut rates once more this year then hold until 2012. On the other side of the fence, Stephen Koukoulas predicts many more cuts.

Property Observer

Following on from ANZ Bank raising its interest rates on Friday, I've summarised the results of Bloomberg's RBA cash rate survey into the chart below. Bloomberg has polled 24 economists after ANZ's decision, and I've shown the high/low forecast for each period in addition to the median (middle observation) and average.

Click to enlarge


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The "median" (red line) economist expects a 0.25 percentage point (or basis point) rate cut in May followed by interest rate stability until the first quarter of next year. The median then forecasts one hike back to 4.25 per cent in 2013. My own May forecast is currently a 'more likely than not' 25-basis-point cut subject to the inflation results on the May 24, which could stay the RBA's hand. 

The "average" economist prediction (orange line) is very similar: the average thinks there is a chance the RBA does not cut in May, albeit this is a slim prospect given the average expectation is 4.03 per cent by May. The average then thinks there is a non-zero chance of a total of two rate cuts this year, and prices in a cash rate of 3.92 per cent until the fourth quarter. The average subsequently starts pricing in rate hikes in 2013. 

The dotted lines in the chart show the highest and lowest forecasts. The lowest any of the 24 economists surveyed see the cash rate going is 3.75 per cent, which implies two more cuts. In contrast, the highest see no cuts at all this year, and a first hike by the first quarter of next year. 

It is always good to condition one's analysis to extreme outliers (i.e., a Steve Keen-style scenario). One such outlier, who was not included in the Bloomberg poll, is the ALP-aligned economist Stephen Koukoulas. Prior to ANZ's decision to hike on Friday, and the strong labour market result last week which showed the unemployment rate unchanged at 5.2 per cent, Koukoulas forecast the Reserve Bank would cut by a massive 50 basis points in May (he admittedly also forecast rate cuts in February and in April). 

Koukoulas has naturally reaffirmed his 50-basis-point cut call for May following ANZ's small rate hike on Friday, although, technically, the Reserve Bank would have to cut by more than 50 basis points to satisfy his pre-ANZ views (i.e., by 56 basis points). Koukoulas thinks we will have lots of cuts going forward – many more than any of the 24 economists polled by Bloomberg. Specifically, he declares: "Get set for a 50 cut in May and probably more cuts in the second half of 2012." If this comes to pass, it will be great news for housing investors.

Christopher Joye is a leading financial economist and a director of Yellow Brick Road Funds Management and Rismark. The above article is not investment advice.

This article first appeared on Property Observer on April 16. Republished with permission.

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