Westpac Chief Economist Forecasts Reserve Bank of Australia Will Increase Overnight Cash Rate in Q3 2015

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By Vittorio Hernandez | March 18, 2014 9:48 AM EST

The Reserve Bank of Australia (RBA) would not likely follow the footstep of neighbour's Reserve Bank of New Zealand which last week its overnight cash rate by 25 basis points to 2.75 per cent.

The chief economist of Westpac, Bill Evans, believes the RBA would only hike the key lending rate by Q3 2015. It is a turnaround from his previous forecast of more RBA rate reductions in 2014.

His forecasts are being watched by the banking industry because of its accuracy since Mr Evans correctly predicted in June 2011 that the Australian central bank would cut interest rates, which the RBA did in November 2011.

Since then, the RBA cut by 2.25 percentage points the overnight cash rate until its last cut in August 2013

He favours maintaining the current lower overnight cash rates.

"Given their rhetoric and their clear resistance to changing rates the cased needed to be very strong," The Sydney Morning Herald quoted Mr Evans.

His forecast was shared by the National Australia Bank and the Bank of America-Merrill Lynch. Saul Eslake, chief economist of BA-Merrill Lynch said,
We remain of the view, notwithstanding some recent data which challenges it, that growth will remain below trend and unemployment will continue to rise for longer than the RBA now does; and we aren't as pessimistic as the RBA seems to be about the near-term inflation outlook."

Mr Eslake points to Q2 2015 as the likely quarter when the RBA would adjust its overnight cash rate. 

Despite Mr Evans' updated forecast, 6 of 34 economists polled by Bloomberg believe a rate cut by the end of 2014. They include Goldman Sachs Group, JPMorgan Chase and Macquarie Bank.

The Westpac chief economist also sees the drop in value of the Aussie dollar to 87 U.S. cents in March 2015, actually slightly up from the previous forecast of 85 cents.

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