Australian interest rates set to plunge, Westpac says

ONE of the nation's big four banks expects the Reserve Bank will soon slash interest rates, while some of Australia's most prominent businessmen have warned that the European debt crisis and struggling Australian households are slamming the economy into reverse.

As Julia Gillard attempts to sell a sceptical public the carbon tax, which she acknowledges represents a massive economic transition, business leaders are warning that the carbon tax debate is about to be overwhelmed by international events they fear could spark a second global financial crisis.

Westpac economist Bill Evans yesterday reversed the bank's long-held view that the next move in interest rates would be up, saying things had turned so bad so quickly that rates could be slashed over the next 12 months by 100 basis points. If passed on in full, this would slash the current standard variable home rate of about 7.8 per cent to 6.8 per cent. He also warned that unemployment was set to jump next year, possibly as high as 5.75 per cent, from 4.9 per cent now.

 

The threat of the sovereign debt crisis in Europe was expected to lead to an "extended period of financial market turmoil", Mr Evans said. European stockmarkets opened lower again last night as traders bet that the debt crisis that has rocked Greece, Ireland and Portugal, and is now spilling into Italy and Spain, will roll on.

 

"The catalyst for the first rate cut is likely to be associated with these European convulsions, but further cuts will be driven by the combined negative impact of European events on confidence and specific domestic issues," Mr Evans said, referring to the "fragile consumer".

This week, the Westpac-Melbourne Institute of Consumer Sentiment slumped to near-historic lows, approaching the levels witnessed in the depths of the GFC. Mr Evans said yesterday: "We do not expect to see a strong bounce-back in confidence in the immediate future." The prediction came as department store David Jones warned of an "unprecedented" fall in sales and chief executive Paul Zahra predicted "exceptionally tough times" wiping off billions in market value of the nation's retailers.

Trevor Rowe, the executive chairman of investment bank Rothschild and one of Australia's best-connected businessmen, predicted the world "lurching from one crisis to the next" and said Canberra was overly distracted by the carbon tax.

He said policymakers should be focusing instead not only on insulating the country from the international debt crises but also eyeing rising mortgage arrears that pointed to a housing market vulnerable to a steep correction. Mr Rowe said the Prime Minister was "not being realistic" when she said this week that the underlying economy in Australia was strong.

One of Australia's leading female directors, Elizabeth Proust, warned that people were worried about jobs and mortgages. They did not "see any leadership from either side politics, just soundbites and stunts". She said there was a real risk of Australia becoming more vulnerable "if economic circumstances worsen globally".

Privately, directors are also increasingly talking about the need to cut jobs in sectors outside mining, particularly in retail and financial services.

Mr Evans said a range of leading employment indicators were turning for the worse. "The dynamics of the economy over the course of the remainder of 2011 and 2012 will be dominated by the key channel of falling consumer confidence and global financial turmoil spilling over to business confidence," he said.

This would lead to lower investment and employment intentions, a fall in employment growth and a rise in the unemployment rate.

While some banks are sticking to their forecast of a continued increase in interest rates - the Commonwealth Bank and ANZ included - there is an emerging view that at the very least the RBA will stay its hand.

Commonwealth Bank chief economist Michael Blythe said it was "pretty clear" the trajectory of interest rates was upwards, but he said confusion still surrounded when the next rate move would be. "We've seen the most extreme set of forces working on the economy that I ever remember," Mr Blythe said. "Some of these forces are very expansionary and some a very contractionary."

Treasurer Wayne Swan defended the government's determination to price carbon, accusing Tony Abbott of undermining economic confidence through his sustained assault on the tax.

Author | Source | Geoff Elliot Business Editor | The Australian | July 16th 2011

ADDITIONAL REPORTING: DAMON KITNEY, STEFANIE BALOGH, LAUREN WILSON, MATT CHAMBERS