Westpac Banking Corporation (ASX: WBC) Chief Economist Bill Evans is tipping two interest rate cuts of 0.25% in 2019, one in August and another one in November.
Why?
In a recent economic report, Bill Evans reported that the Australian economy’s growth slowed its GDP to a 1% annualised pace at the end of the December 2018 quarter, from a 4% annualised pace in the first half of the year. Obviously, this is a sharp drop in growth with interest rates already at such low levels.
Global economic growth is slowing and there are trade tensions between the United States and China. Mr Evans thinks it is unlikely for the Australian economy to bounce back to the RBA’s targeted GDP growth forecast of 3% without major stimulus. Property prices have been falling in Sydney and Melbourne, while residential construction has slowed so where will the required stimulus come from for the economy?
Weak Consumer Sentiment
Westpac has been keeping a measure of Australian consumer sentiment through its Westpac-Melbourne Institute Index of Consumer Sentiment since 1974, with its latest measure in March coming in at 98.5, a fall of 4.8% from February – ‘pessimists again outnumber optimists’.
What If Interest Rates Fall?
Obviously if interest rates fall, this is bad news for savers and retirees as they earn less on their deposits and yield-hungry investors will chase stocks for their dividend yield such as Westpac, Commonwealth Bank of Australia (ASX: CBA), Australia and New Zealand Banking Group Ltd (ASX: ANZ), National Australia Bank Ltd (ASX: NAB) and maybe even Telstra Corporation Ltd (ASX: TLS) who may cut their dividend again.
For those who don’t yet have a home and are wanting to buy, the weak consumer sentiment coupled with falling property prices could represent a good time to buy now.
Personally, I can only wish my decision to purchase a house a little over 18 months ago had similar circumstances to today’s market. For those who already have a house, reducing your mortgage to a loan value ratio (LVR) below 80% and implementing a debt recycling strategy to purchase shares, an index fund or ETF could be a smart move.
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