Westpac Forecasts 4 More Interest Rate Cuts for 2012

To address global financial concerns over the European situation as well as weakening consumer confidence in Australia, Westpac chief economist Bill Evans forecast four more overnight cash rate cuts by the Reserve Bank of Australia (RBA) in 2012.

Mr Evans predicted the benchmark lending rate would go down as low as 2.75 per cent by the end of December from its current 3.75 per cent, while standard variable rates on mortgages would dip to about 6 per cent.

He said the Australian central bank would likely spread the cut of the rate by 25 basis points each in June, July, August and one by the end of the year.

"You can't ignore what's going on in the market. There's a fair degree of disquiet... Monetary policy is too tight given the shock to confidence and the fragility of the economy. Retail has lost its momentum, house prices have edged off, capital spending is quite soft, excluding mining," The Sydney Morning Herald quoted Mr Evans.

Indicators of the faltering Aussie economy include the worst performance of the local sharemarket in May, over 10 per cent drop in share prices of BHP Billiton, Rio Tinto and Fortescue, a 7.3 per cent decline in the ASX/S&P 200 Index and six-month lows in stock trading.

Mr Evans said there is a need for the RBA to cut its rate sharply to lower home loan rates currently just over 7 per cent and stimulate the economy.

Overseas, Australia's mining sector is concerned over the decline in demand for iron ore by Chinese steel mills which went down 12 per cent in March to just 25 million tonnes. For the first quarter of 2012, China's steel mills lost a total of 1 billion yuan which led to the idling of a significant number of steel mill blast furnaces.

Mr Evans added that the European crisis will have a severe impact on business and consumer confidence in Australia.

"Greece is unlikely to leave the euro (but) the European scene will be market by rolling crises and bailout packages against a protracted recession," Mr Evans was quoted by the Herald Sun.

The RBA has cut the overnight cash rate by 50 basis points in May to 3.75 per cent from 4.25 per cent which it left unchanged in its February, March and April monetary board decisions. However, the local banks even increased their interest rates in March and April, and kept part of the rate cut in May.