Rates to fall further amid signs jobs market is failing to strengthen

One of the nation’s biggest banks has warned that official interest rates will be halved within months in a bid to strengthen the economy as signs grow job seekers in Sydney and Melbourne will find it increasingly difficult to get work.

Westpac on Wednesday became the first of the major banks to predict the Reserve Bank of Australia, which has cut official rates at its last two board meetings, will be forced to take rates down to 0.5 per cent. It may even have to consider a radical plan to lend directly to commercial banks to help drive down mortgage rates.

The bank’s chief economist Bill Evans said the Reserve was likely to hold rates at its meeting in the first week of August, however beyond that there seemed little option but for it to continue slicing the cost of money.

A quarter percentage point cut by October and then a follow-up reduction at its February meeting were now likely.

“Our forecasts of inflation and unemployment emphasise the extent of the challenge faced by the RBA in boosting demand and wages and reaching their own targets,” Mr Evans said.

“We expect that the RBA will eventually see only one more rate cut, in October, as being an insufficient response.”

If passed on in full, a further half percentage point reduction in mortgage rates would save a person with a $400,000 loan more than $100 a month.

But none of the major banks have passed on the full value of the previous two rate cuts with suggestions they may struggle with any future reductions.

Mr Evans said the RBA may have to look at ways to help banks deliver the full impact of rate cuts to their customers, pointing to the way the Bank of England effectively lent cash to commercial banks in a bid to drive down lending rates.

“The point is that the combination of a rate cut and a financial package appears to have been quite effective in maximising the impact of the cut. The details of any domestic package, of course,
would need to be best suited to the Australian financial system,” he said.

There are also concerns about the possible financial dangers from the combination of low-interest rates and recent bank regulation changes aimed at making it easier for people to borrow.

Moody’s analyst Jacqui Dredge said the changes, while helping to boost the overall property market, would likely draw in more investors and deliver potential mortgages to people with lower incomes.

“The lower interest rate floors will lift the borrowing capacity of home buyers, and as a result increase the risk of defaults and losses for new mortgages and residential mortgage-backed securities,” Ms Dredge said.

“But (it) will likely also bolster demand in the housing market, supporting outstanding mortgages and residential mortgage-backed securities.”

RBA governor Philip Lowe is due to give the annual Anika Foundation speech on Thursday where he will talk about inflation targeting and its importance to general economic welfare. The RBA has failed to meet its own inflation target of 2-3 per cent for the past two years.

The bank has argued its rate cuts will help drive down the unemployment rate which in turn should push up wages and bring inflation back to within its target.

But the Department of Jobs’ monthly measure of employment vacancies, released on Wednesday, suggests the job market is failing to improve with concerning signs out of the major Sydney and Melbourne markets.

In June, the internet vacancy index fell by 0.6 per cent, its sixth consecutive monthly fall. It now sits 6.7 per cent or 12,300 job ads fewer than a year ago, the biggest annual drop in more than five years.

Ads have fallen by almost 11 per cent in NSW and by 6.6 per cent in Victoria. Ads across Sydney are down by 14.5 per cent while in Melbourne they have slipped by 9.3 per cent in a sign the major city economies are slowing.

Ads for machinery operators have dropped by 17.3 per cent while those for labourers are down by 14.9 per cent. There remains growth in the education, health and welfare support areas that are all benefiting from increased government funding and the National Disability Insurance Scheme.