The Reserve Bank of Australia will lower its overnight cash rate target to a record low this year as Europe’s escalating debt crisis damages global growth, Westpac Banking Corp. (WBC) chief economist Bill Evans predicted.
The RBA will reduce the benchmark by a quarter percentage point at its June 5 meeting and follow that with cuts in July and August and a final move in the fourth quarter to 2.75 percent, Evans said in a research report today. He previously saw 3.25 percent as the low point in the easing cycle that included quarter-point reductions in November and December and a half-point reduction May 1.
“These two extra cuts are based on our assessment that the global environment -- read Europe -- has deteriorated even further,” Evans, who correctly picked the degree of easing in the past eight months, wrote in the report. “In turn this deterioration is expected to have a more severe impact on confidence in Australia than had earlier been expected.”
Traders are pricing in more than 1 percentage point of central bank easing by August, according to swaps data compiled by Bloomberg. That would take the RBA’s key rate below the record-low Australian benchmark borrowing cost of 2.89 percent set in January 1960.
The RBA dropped the cash-rate target to 3 percent in April 2009, the lowest since it started setting the benchmark in 1990, as policy makers around the world responded to the crisis precipitated by the collapse of Lehman Brothers Holdings Inc. in 2008.
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