Transcription of Finance News Network interview with Westpac Banking Corporation (ASX:WBC) Senior Economist, Bill Evans Lelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me today from Westpac Banking Corporation
(ASX:WBC) is the bank's Senior Economist, Bill Evans. Bill, welcome back to FNN.
Bill Evans: My pleasure.
Lelde Smits: When we last spoke a year ago you predicted rates would bottom out around 3.75 per cent in 2012. But with rates are now sitting at 3 per cent why do you believe the RBA [Reserve Bank of Australia] has cut so aggressively?
Bill Evans: The economy was weaker than they expected, the labour market was much weaker than they expected, inflation was lower than they expected and in the second half of the year [2012] they became concerned about the sustainability of the mining boom. With low inflation, a weakening domestic economy and a mining boom that is coming to a peak; that meant that the non-mining parts of the economy needed to be stimulated and low interest rates were required to do that.
Lelde Smits:Where do you think interest rates will move this year and where will the RBA be looking for direction?
Bill Evans:Well we haven’t actually changed our interest rate forecast since May last year, when we lowered it from a low point of 3.75 per cent to a low point of 2.75 per cent. It’s now at 3 per cent, we do expect another rate cut in the next few months.
Then we’ll make a decision at that point as to how the rate cuts have started to impact upon the economy but I think clearly there are little prospects of rates rising, if rates move further in the second half of the year it will be down.
Lelde Smits: Now the S&P/ASX 200 lifted over last year; buoyed by easing concerns for China's growth and European debt, also the US economy, but which region do you believe poses the greatest risk to market sentiment this year?
Bill Evans: We have been somewhat out of line with market thinking around China. Last year the market thinking was China’s heading for a hard landing and that of course meant that resource stocks were given quite a bad time.
We thought, no not a hard landing, the government will ensure that China will have a soft landing and indeed growth will pick up through the course of the first half of this year, and that’s what we’re starting to see.
However, we think the peak in growth will be the middle part of the year, and in the second half of the year the government will be comfortable to moderate growth.
That means that the euphoria that we’re seeing around commodities and around China at the moment will start to ease in the second half. So while I’m quite optimistic about the resource sector in the first half of this year, I feel we may run into some headwinds in the second half.
Lelde Smits: And how do you believe these headwinds would show themselves?
Bill Evans: Well we see for instance a peak in the iron ore price of $US170 by the second quarter of this year, it’s moved even more rapidly than we expected. But we would think in the second half of next year things will start to tail off, and that will have an impact upon resource stocks.
Lelde Smits: So back to S&P/ASX200 index - and as we're trading around the 4,700 level now, where do you see the key index heading by year end?
Bill Evans: Look I think there’ll be some volatility; I would expect that it’ll touch 5,000 at some point during the year, but we’ll probably end the year around about these current levels.
Lelde Smits: Ok Bill, so with rates heading lower and the market heading higher - how would you rate Australian consumer sentiment?
Bill Evans: Consumers are still very nervous about their job prospects; they’re concerned about their finances. The interest rate cuts haven’t had the traction with them that we’ve seen in the past, and I’d be surprised if we much of a change with that for the next six months or so.
Lelde Smits: And what do you believe it would take to boost sentiment?
Bill Evans: Look I think we need a different approach in fiscal policy, I think the government is too focused on paying down debt. Monetary policy as we can see has been doing its job but it’s not a tough enough tool to be able to achieve the objectives that we need.
Lelde Smits: Bill Evans, thank you so much for the outlook today.
Bill Evans: Thank you.
Ends
