‘Wisdom of the oldies’: One hundred years of experience says interest rates will go down

Three of Australia’s foremost market economists - with a century of experience between them – are defying their peers and traders’ bets by predicting the central bank will be forced to resume cutting interest rates.

Hours after the Reserve Bank of Australia signaled it was abandoning a two-year easing cycle, Westpac chief economist Bill Evans, National Australia Bank’s Alan Oster and and Bank of America Merrill Lynch’s Saul Eslake were sticking to the view that rising unemployment and the end of a mining boom will drive the overnight cash-rate target lower.

“It’s the wisdom of the oldies,” Oster, a former economist at the nation’s Treasury, said in a phone interview. Evans, the first to call the easing cycle that began late in 2011, said he’s still predicting two rate cuts in the second half, forecasting joblessness will rise to a 12-year high and subdued wages will keep a lid on inflation.

Eslake, who last year set a 25 percent chance of a recession in 2015, said he’s “used to the idea of having a minority point of view”.

The local dollar jumped yesterday and again today as traders discounted the chance of further easing after the RBA said “the most prudent course is likely to be a period of stability in interest rates.”

In his statement accompanying the decision to hold the cash rate steady at a record-low 2.5 percent, governor Glenn Stevens expressed greater confidence in consumer demand and housing construction, saying economic growth is expected to strengthen.


Rates bets

Policy makers will add 10 basis points to the cash rate over 12 months, swaps data compiled by Credit Suisse show. JPMorgan Chase and 4Cast also expect a lower benchmark this year, while nine economists see a higher rate and 14 analysts expect the target will remain unchanged, according to a survey by Bloomberg News afternoon.

Evans, who oversees Westpac’s consumer sentiment survey, and Oster, who runs NAB’s business confidence gauge, have the benefit of their banks’ businesses to draw from in making their calls. Sydney-based Westpac is the nation’s second-biggest mortgage lender after Commonwealth Bank of Australia, while Melbourne-based NAB is the largest lender to businesses.

‘Best data’

“We have the best data,” Oster said, referring to the major banks. He said he’s not convinced improvements in NAB’s business sentiment gauges will be sustained given that readings of forward orders, wholesale and capital expenditure remain weak.

Oster, Eslake and Evans said a downturn in the mining investment cycle will detract from growth, and said an acceleration in inflation in the fourth quarter is likely to moderate. None expect a sharp decline in the Australian dollar.

Economists from CBA and ANZ. - the other two members of Australia’s big four banks - expect the RBA’s next move will be higher. ANZ sees the first increase in 2015, while CBA expects a rise in the final three months of this year.

“It is clear that the RBA is not still harboring serious thoughts that more monetary stimulus may be needed this cycle, especially given the significant depreciation of the Australian dollar since mid-2013,” said John Peters, a senior economist at CBA.

Housing, confidence

Stevens signaled yesterday that the rise in the employment- intensive housing construction industry that policy makers have been seeking from record-low rates is beginning.

“Information becoming available over the summer suggests slightly firmer consumer demand and foreshadows a solid expansion in housing construction,” Stevens said.

“Some indicators of business conditions and confidence have shown improvement.”

The International Monetary Fund last month raised its forecast for global growth this year as expansions in the US and UK accelerate. The Federal Reserve has begun reducing its unprecedented monetary stimulus, while some economists are tipping Bank of England governor Mark Carney will raise rates as soon as this year.

European Central Bank president Mario Draghi and Bank of Japan governor Haruhiko Kuroda are forecast to maintain or even ease monetary policy.

Evans said the US economic recovery may disappoint, while Oster flagged concerns in India and slower growth in China. One of Westpac’s advantages is the ability to make its own global calls, including on the Fed, rather than being constrained by forecasts from overseas colleagues, as is the case with a global bank, Evans said.

Controlled view

“I like to control the Fed view,” he said. “I think the Chinese data is going to lose momentum, and I’m very sceptical about the stability in Europe and the pace of recovery in the US.”

Spending cuts by Australia’s new government were also likely to hurt demand, Evans said, while Oster flagged the risk of a “horror budget” weighing on growth.

The coalition government, elected in September, is pledging to return the budget to surplus within a decade, even as it scraps taxes on carbon emissions and mining profits. The Treasury’s December forecast for an underlying cash deficit of $47 billion in the year ending June 30 compared with an August projection of a $30.1 billion shortfall.

In a June 2013 research report, Eslake saw about a 25 percent chance of a recession starting in the second half of 2015, an estimate criticised by then-Prime Minister Julia Gillard. When Evans in mid-2011 called the start of the easing cycle, he was also the outlier in a Bloomberg News survey, with the other economists forecasting an increase or no change.

“You say to yourself, ‘do I feel comfortable standing up in front of my customers saying this,’” he said. “That’s the test.”