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Rate cut hopes rest on 'weak foundations'

By Staff Reporter

The Commonwealth Bank has bucked the trend by forecasting that the Reserve Bank of Australia is unlikely to cut interest rates in 2015.

The official cash rate has remained at a record-low 2.5 per cent since 2013, but both Westpac and NAB forecast last month that the cash rate would fall to at least 2.0 per cent in 2015.

SQM Research managing director Louis Christopher recently announced that the markets consider it a “dead certainty” that rates will fall by April.

However, last week, CBA said that arguments for near-term rate cuts rest on “weak foundations”.

“It is now quite likely that the RBA remains on the sidelines through 2015,” said CBA chief economist Michael Blythe.

According to the CBA, RBA governor Glenn Stevens weakened the argument for an imminent rate cut last month when he said he wanted monetary policy to be “conducive to confidence”.

“So those in the rate-cut camp need to ask if further cuts would be helpful to confidence,” Mr Blythe said. “The sharp drop in consumer confidence and pull-back in business confidence in the first half of December reflects, in part, the rate-cut speculation that surfaced at the time. It appears that households and business now equate rate cuts with ‘bad’ economic news.”

CBA said the interest rate debate would probably swing in late 2015 from cutting to increasing the cash rate.

“We still expect a fairly modest and drawn-out approach that returns the cash rate to a neutral level of 3.5 per cent,” the bank said. “In practice, this would equate with a 25-basis-point rise each quarter during 2016."

Rate cut hopes rest on 'weak foundations'
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