Westpac chief economist Bill Evans says the Australian central bank is likely to loosen monetary policy soon while he is taking a more sanguine view of Chinese growth prospects than what he says is the consensus view.

Westpac chief economist Bill Evans says the Australian central bank is likely to loosen monetary policy soon while he is taking a more sanguine view of Chinese growth prospects than what he says is the consensus view.

Evans still expects Australian interest rates to rise in 2016 as the world economy picks up but now takes the view that the Reserve Bank of Australia will cut rates in the early part of next year to boost domestic demand and reduce the exchange rate of the Australian dollar before clearer signs of world growth come through.

“We expect a 25bp rate cut at the February Board meeting and another one to follow in March,” Evans said in a note.

“We think that the weakness in the [Australian] September quarter national accounts - including falling inflation; contracting national incomes; and a loss in growth momentum - coupled with further sharp falls in commodity prices, continued weakness in consumer sentiment (down to 3 year lows) will be enough to prompt the RBA to use some of their remaining policy ‘scope’ and lower rates further,” Evans said.

Westpac has cut its gross domestic product growth forecast for Australia next year to 2.7 per cent – a below-trend outcome – from its previous forecast of 3.2 per cent.
 
China
Evans said that unlike the Australian government, which has cut its Chinese growth forecast to 6.75 per cent in 2015 and 6.5 per cent in 2016, Westpac sees growth figures of around 7.5 per cent for both these years.
 
“Our interpretation of the government’s forecast is that they are placing greater emphasis on the structural challenges facing China’s growth model, whereas we are overlaying cyclical views on policy (easing) and external demand (improving),” Evans continued.

“Our critique of this consensus is not that we dispute the structural challenges confronting China. It is that China’s structural impediments will lower the multiplier effects from easier policy and rising global growth, but they do not reduce them to zero. Relating that to commodity prices, here too structural issues are weighing on prices, but that does not mean that they are a) completely resistant to an improving demand environment, or b) that unprofitable producers can stay in business for ever. Those forces are likely to see a substantial rebalancing of the demand/ supply forces , particularly in iron ore as we traverse the second half of 2015 and 2016,” he added.