Westpac’s Evans revises his rate cut predictions

Suspicion is growing that the Reserve Bank of Australia (RBA) may be more concerned by a pending property price bubble than it is letting on, causing two senior economists to revise their predictions regarding further rate cuts.

Bill Evans from Westpac (ASX: WBC) recently predicted that a 25 basis point rate cut would occur by Melbourne Cup Day next month, based on the rising unemployment rate, poor growth in non-mining sectors and a strong Australian dollar.

However, earlier this week when the central bank met, it was noted that the rise in house prices was not mentioned when the decision was made to leave interest rates at 2.5%. Richard Coppleson from Goldman Sachs said, “It tells me that it must be the elephant in the room and that by ignoring it… they have just highlighted how concerned they must secretly be.”

Whilst Evens still believes that the official cash rate will be cut to as low as 2%, he now anticipates that the cuts will occur in February and May, whereby the RBA can assess a boost in post-election confidence and a pick-up in house prices. Alan Oster from NAB (ASX: NAB) holds a similar view, suggesting that a cut would be put back to February.

Foolish takeaway

The resilience of the Australian dollar is one of the more pressing issues which could cause the RBA to act on cutting interest rates sooner rather than later. Companies that are heavily exposed to overseas markets, such as QBE Insurance (ASX: QBE) or Cochlear (ASX: COH), would greatly benefit from relief from the strong dollar.

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Motley Fool contributor Ryan Newman owns shares in Cochlear.

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