Westpac Banks on Interest Rate Cut

28 Jul 11

Westpac is sticking to its bold call that the next adjustment in official interest rates will be down, despite yesterday's shock inflation numbers lifting economists' expectations of a rate hike.

The consumer price index jumped 0.9 per cent for the three months to June, well above the Reserve Bank's target quarterly rate, prompting investors to pile into the dollar, which rose US1.5c to a 28-year, post-float record of $US1.108 in early European trade last night, reported The Australian.

Overwhelmingly, economists now expect a rate increase before the end of the year, tightening the squeeze on sectors like retail and manufacturing that are already under pressure from the slump in consumer spending.

But Westpac backed the prediction of its chief economist Bill Evans two weeks ago that the RBA would lower rates.

"There's discomfort in the CPI figure for someone predicting rate cuts, because with all things being equal the RBA would tighten rates," senior economist Huw McKay said.

"However, we see a historically subdued consumer who is anxious about lots of things, including household finances, due to rising food and fuel prices."

Mr Evans broke from the pack on July 15, arguing that the economic environment had deteriorated so quickly that rates could be slashed by 100 basis points over the next 12 months.

The catalyst for the first cut, he said, would be European debt convulsions causing an "extended period of financial market turmoil".

By Richard Gluyas of the Australian