Westpac is the first of the big banks to reverse its interest rate forecasts, predicting the Reserve Bank will cut twice in 2015.
The bank joins a growing list of experts tipping the RBA will cut the cash rate from 2.5 per cent to a new record low because of the slowing economy and high Australian dollar.
Westpac chief economist Bill Evans had expected the next rate move to be a hike, but now forecasts a cut at the RBA’s next meeting in February, and again in March.
“We now expect the RBA to cut rates further in the early months of 2015 in an effort to bolster domestic demand and lower the Australian dollar,” he said.
Mr Evans’ change mirrors that made by AMP Capital chief economist Shane Oliver, who has also pencilled in two rate cuts in 2015 following Wednesday’s disappointing economic growth figures.
A cash rate of two per cent was needed to get the Australian dollar down to 75 US cents, he said, following an unexpected slump in commodity prices.
Although the dollar had recently fallen against the US currency, it had risen against the yen and the euro, he said.
“Commodity prices – iron ore, oil – they’ve come down a lot more than I or the RBA or the government would have expected, and that’s a huge change,” Dr Oliver said.
“When you put that together with low growth and chronic pessimism, that doesn’t bode well for growth ahead.
“There has to be a circuit breaker and I think it’s a further leap down in the Aussie dollar and to get that we’ll likely require more rate cuts.”
Goldman Sachs and RBC Capital Markets also changed their forecasts following the soft GDP figures.
Goldman Sachs expects two rate cuts in 2015, with the cash rate at two per cent by August, while RBC has scrapped expectations of a hike in the December quarter and predicts rates to stay on hold until late 2016.
St George, Macquarie Bank and Moody’s economists are reviewing their forecasts.
Meanwhile, the futures market is pricing in a 92 per cent chance of a rate cut by the end of 2015.
Official figures on Wednesday showed the economy grew by a much weaker-than-expected 0.3 per cent in the September quarter, with annual growth at 2.7 per cent.
Even before their release, Deutsche Bank forecast a rate cut to two per cent next year.
Credit Suisse had also said the RBA needed to cut rates below two per cent and Saxo Bank said a cash rate as low as 1.5 per cent was needed.
Market Economics managing director Stephen Koukoulas is also forecasting a cash rate of 1.5 per cent by late 2015, given low inflation and rising unemployment.