News: Bill Evans predicts two H1 rate cuts

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Transcription of Finance News Network interview with Westpac Banking Corporation (ASX:WBC) Chief Economist, Bill Evans
 
Lelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me from Westpac Banking Corporation (ASX:WBC) is its Chief Economist, Bill Evans. Bill, welcome back to FNN.
 
Bill Evans: My pleasure to be here Lelde.
 
Lelde Smits: The Reserve Bank of Australia (RBA) has kept Australia’s key cash rate on hold at a record low of 2.5 per cent for the sixteenth straight month. Bill, when will we see a change?
 
Bill Evans: Well, while most people are in denial that something could happen as soon as February I think February could be the best time for the bank to start cutting rates. I don’t think that there is any doubt that they will cut rates in the first half of this year, it is just a matter of picking the timing.
 
The reason why February is a good time to do it, is that in February they also release their Statement on Monetary Policy and they are able to change their forecasts. And so, if they have cut rates at their February meeting they can provide a very detailed explanation as to why that has happened. 
 
Lelde Smits: So Bill, you say rates are moving lower in February.How much are you expecting the RBA will cut?
 
Bill Evans: In February it will only be by about 25 basis points. I think if it was to be more than that, then the Governor [Glenn Stevens], being concerned about the impact on confidence of a rate cut, if it were more than the expected 25 [basis points] then that might smack of desperation. He certainly wouldn’t want to be doing that.  
 
Lelde Smits:  What is your forecast for the remainder of the 2015 calendar year?
 
Bill Evans: I think we’ll see another cut this year, at the moment I favour March. Because I think in the second half of this year things will be starting to look better. The world economy will be starting to look a better place, particularly in China and the US.
 
Lelde Smits: So Bill, by the end of this year where do you see Australia’s key cash rate?
 
Bill Evans: I think it will still be at 2 per cent. But, by the middle of 2016 I think we’ll start to see things edging up.
 
Lelde Smits:  The RBA’s Governor Glenn Stevens has recently indicated his preference for the Australian dollar to move to about $US0.75. Where do you see the dollar headed this year?
 
Bill Evans: Our target is $US0.80 and we adopted that some time ago. I think that the issue around going much lower than that would require more bad news around the world economy, particularly around China, and the US starting to run out of steam. I don’t really think that will happen. 
 
Lelde Smits:  Australia’s unemployment rate rose to 6.3 per cent in November. How do you see the state of our labour market and where do you see it trending over the following year?
 
Bill Evans: It will be trending higher. We expect it could get as high as 6.75 per cent. The population growth is running at around about 1.8 per cent. That means that you have to be adding about 1.8 per cent in jobs every year, and we are just not doing that. 
 
Lelde Smits: The mining boom is well and truly fading. How do you expect to see the economy transition, and Bill which sectors are we likely to see pick up the slack?
 
Bill Evans: Well we have already started to see some turn around in the service export sectors. That’s education, tourism, financial advice, financial services being exported. That has already started to turn. Of course we’ve already started seen a huge lift in construction in response to the low interest rates, particularly residential construction. Non-residential construction actually is slowing down at the moment under the weight of very high vacancy rates in the central business districts. Anyone who is servicing the construction cycle, certain manufacturers will be doing well. But, the key retail sector has still got a lot of hurdles to overcome.
 
Lelde Smits: So Bill overall, how can we expect Australia’s economic performance to look like in 2015?
 
Bill Evans: I think this year it will be in two halves. I think the first half will be very disappointing. I would be looking at growth pace of about 2.5 per cent. That will be characterised by interest rate cuts, a weak currency, ongoing weak confidence. But I think, coming into the second half of the year the world economy will be starting to improve. It will benefit from these very low oil prices, it will benefit from stimulus’ packages that are going on in China at the moment, and the US economy is continually gathering momentum.
 
So, second half looking better, commodity prices starting to lift, incomes being boosted.
 
Lelde Smits: Bill Evans, thank you for your insights and outlook for the year 2015.
 
Bill Evans: Thank you.
 
 
Ends