Big four banks divided on possible rate cut

Speculation about another interest rate cut is starting to intensify ahead of next week’s Reserve Bank board meeting.

Westpac has forecast that the board will reduce the official cash rate from its record low setting of 2.25 per cent, where it has been since February.

However, NAB has changed its forecast and now expects the board will leave rates on hold at the 5 May meeting.

Westpac chief economist Bill Evans said the reason the board didn’t cut rates in April was because it wanted more time to assess whether or not the economy was on the forecast path.

“It seems that even the ‘previously forecast path’ would be sufficient to justify another rate cut,” Mr Evans said.

He said a key factor might be the Reserve Bank’s next statement on monetary policy, which it will only release on 8 May.

“If we are right and the board has decided to cut its growth forecast in 2015 and 2016, probably from 2.75 per cent and 3.50 per cent to 2.50 per cent and 3.25 per cent respectively, then a decision not to cut would seem particularly bizarre.

“Not delivering the assumed cut and lowering the growth forecast would be internally consistent, but hardly a likely policy option for a bank that appears comfortable about the inflation outlook but concerned about below-trend growth.”

NAB chief economist Alan Oster also said another rate cut is coming, but that it would occur in August rather than May.

Mr Oster pointed to a recent speech from Reserve Bank governor Glenn Stevens, which implied that the board would be cautious about cutting rates because they’re already at record lows and household debt is high.

Statistics also show that house prices are continuing to rise strongly in Sydney and are also rising in other capitals, Mr Oster said.

“Taking all these factors into account, we expect it would be prudent for the RBA to again hold the cash rate at 2.25 per cent on 5 May but again signal they are prepared to cut the cash rate further if that would sustainably lift economic growth.

[Related: Bank modelling has RBA cutting rates to 1pc]

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