Slowing US changes views

A MODERATING growth outlook and a slowing US has caused some economists to change their tune in relation to the interest outlook.

With the Reserve Bank due to meet on November 5, Westpac general manager economics Bill Evans believes the Reserve Bank will hold tight on rates for at least the next 12 months.

“However, we stress that this forecast is underpinned by greater than usual uncertainty,” he said.

“The distortions to the Australian data – the lagged impact of the weaker currency on margins and the uncertainty surrounding the US economy make the risks to the rate outlook unusually high.

However in the monthly BankWest Review of the WA Economy report BankWest economist Alan Langford writes that the RBA may still be looking for an opportunity to close the differential between the local cash rate of 6.25 per cent and the US rate of 6.5 per cent.

“The RBA may look to restore a positive differential if GST adjusted domestic inflation threatens to stay above 3 per cent for anything more than a quarter or two,” the report says.

“If the US economy’s breakneck growth rate does in fact moderate further in coming months, then the current federal funds rate is likely to be the peak in the current cycle of short-term US interest rates.

“However, if US growth pauses only temporarily and modestly, then Australia’s growth is likely to remain at a rate that will require a domestic cash rate close to, if not at or above seven per cent by the middle of 2001.”

The report says long-term interest rates have remained low even in the face of rising inflationary pressures, in large part because global fiscal consolidation had allowed governments to retire outstanding debt.

“However, in the event of a hard or possibly even a crash landing of the US economy, budget surpluses would evaporate quickly with likely significant upside implications for long-term interest rates,” it says.

“Nevertheless, although the hard landing scenario needs to be recognised, it should not be overemphasised, lest in becomes a self-fulfilling prophecy.”

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