SYDNEY (Reuters) - Australia’s central bank is likely to cut interest rates twice next year, taking the cash rate to 0.25% by June 2020, and then introduce quantitative easing (QE), Westpac Banking Corp said on Wednesday in a change to its house forecasts.
Westpac’s previous forecast was for the policy rate to fall to 0.5%. The cash rate is currently at a record low of 0.75% after three cuts of 25 basis points since June this year.
The revised outlook followed a speech by Reserve Bank of Australia (RBA) Governor Philip Lowe on Tuesday, in which he said he did not expect to have to use QE in Australia, but that it could happen if the cash rate was cut to 0.25%.
“The RBA has indicated it is prepared to push the cash rate to 0.25%,” Westpac chief economist Bill Evans said in a report.
“Westpac has always argued that monetary easing will be necessary in 2020 but assessed that the RBA would see 0.5% as the effective lower bound.”
The Australian dollar eased in afternoon trade to around $0.6770, just above its lows for November. The currency had been on the defensive through the day after markets factored the potential for an extra rate cut.
On Tuesday, Lowe outlined a limited range of options for QE, ruling out buying private assets and saying negative interest rates were extraordinarily unlikely.
“There may come a point where QE could help promote our collective welfare, but we are not at that point and I don’t expect us to get there,” Lowe told an economists’ dinner.
Evans said he expected the RBA would hold its second cut until June 2020 so that it could see the government’s annual budget, which is delivered in May, and to benefit from market expectations of its commitment to ease for as long as possible.
That expectation of a second cut meant Westpac had pushed back the timing for the introduction of QE to the second half of 2020, and Evans noted the high hurdles Lowe had set to use it.
“However, we expect that with the unemployment rate stuck at around 5.6%, the U.S. Federal Reserve easing rates and no further interest rate flexibility available, Quantitative Easing will surely become an attractive option,” he said.
Reporting by John Mair; Editing by Shri Navaratnam and Sam Holmes