Cash rate to hit 2.5 per cent: AMP Capital

The official cash rate will drop to as low as 2.5 per cent by mid-2013, one leading economist has claimed.

AMP Capital’s head of investment strategy and chief economist, Shane Oliver, said Australian economic data remained soft over the past two weeks with flat credit in November, a fall in house prices in December and more weak readings from the AIG manufacturing and services conditions indicators in December.

“This is all consistent with the Reserve Bank (RBA) still having more work to do on interest rates,” Mr Oliver said.

“I expect another two cuts, taking the cash rate to 2.5 per cent by mid-year.”

Mr Oliver said he anticipates the RBA will stop cutting the cash rate once it reaches 2.5 per cent.

“The improving global economic outlook, highlighted in particular by the rebound in the iron ore price up to around US$150 a tonne from a low in September of just US$85 a tonne, suggests we are getting close to the low in the cash rate and that a cut to two per cent is unlikely,” he said.

Mr Oliver’s comments come after other industry stakeholders also called for bigger rate cuts.

Towards the end of last year, Residex’s John Edwards said rate reductions were not having the same impact they once did and more needed to be done.

“Perhaps in this situation, each rate reduction simply reinforces consumer views that we are in for a tough 12 months ahead and hence they should save money and not spend, something the press is also constantly reinforcing presently,” Mr Edwards said.

“Fewer rate reductions of a larger scale may well be more effective than a constant string of small adjustments that are constantly causing poor press about the economy,” he said.

“Should the RBA continue along the road of small reductions, there is a real risk that it will need to reduce the cash rate to two per cent or less. However, should it move to a much more significant reduction in February (of around 0.75 per cent), this would probably achieve its objectives and bring the cycle of small rate adjustments to an end.”

The next RBA board meeting is scheduled for February 5.

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