Westpac expects the Reserve Bank of Australia (RBA) to lower its cash rate to 0.75% by October, predicting another cut by February 2020, which will take the interest rate down to 0.5%.
The central bank cut its interest rate to a historic low of 1% in July, but Westpac predicted it could drop to 0.75% by October, having previously projected a November cut.
The unemployment forecast is going to challenge the RBA, according to Westpac chief economist Bill Evans.
“By October, we expect that the path of the unemployment rate will be sufficiently contrary to the RBA’s plans that they will have appropriate justification to ease policy a little earlier than we have previously expected,” Evans said.
The weakening labour market due to the high level of unemployment could also force the central bank to make another 0.25% cut by February next year, taking the interest rate down to 0.5%, according to Evans.
In the event the cash rate hits 0.5%, the central bank should support the monetary policy easing with other financial measures for banks and lenders to pass on the full rate cut to consumers, Evans said.
“The point is that the combination of a rate cut and a financial package appears to have been quite effective in maximising the impact of the cut. The details of any domestic package, of course, would need to be suited to the Australian financial system,” Evans said.
