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Cash rate to hit 2%

Westpac's senior econmic Bill Evans is holding firm to his view that the RBA will reduce the cash rate to 2% by the March quarter of 2014.  

The Reserve Bank has noted strengthening conditions in the housing market, but it remains worried about demand for home loans, says Westpac chief economist Bill Evans.

Evans said the primary reason for the rate cut in May was a “surprise low print for inflation in the March quarter” as well as a “downbeat assessment of business conditions”.

But, he says the RBA board also “takes considerable notice of credit growth” qualifying its statement that housing loan approvals are improving with the comment that “credit growth remains subdued to date” along modest growth in business debt.

Evans is sticking with his expectation, post the May rate cut, that the cash rate will fall to 2%, as well as a June rate cut, but with some degree of uncertainty on the timing.

“We were also sufficiently encouraged, particularly around the Governor's statement that implied there was more scope to ease policy, to expect a follow-up move in June

“Accordingly, while we are confident about our medium term view that the cash rate will eventually reach 2%, the choice of a June or later date for the next move is highly subjective.

“We are comfortable to reserve any decision to push back that call until we see Australian dollar and capital expenditure evidence over the next week," he says.

The government’s capital expenditure plans are to be released on May 30, which Evans says are “so important for the bank's overall plan to rebalance investment towards non-mining activities".

ANZ economist Justin Fabo has a 25 basis point rate cut “pencilled in” for later this year.

“Combined with our subdued outlook for overall business investment, however, and an expectation that the currency is likely to remain elevated for a while yet, our view is that the cash rate is still more likely than not to be lowered a little further,” he says.

CommSec economist Savanth Sebastian says the RBA has “made it clear that it is not done cutting rates” though it is unlikely that multiple rate cuts are on the cards.

“Certainly with inflation well contained and expected to be within the target 2% to 3% band over the next couple of years policymakers can rest easy while maintaining an easing bias,” he said.

Their views certainly seem to be supported by the fixed rate market which is currently offering 2-3 year fixed rates below 5%. Indicating a low rate environment might be here for some time to come.