ANZ predicts the Reserve Bank of Australia will drop interest rates

ANZ has broken ranks with its major rivals to predict that stubbornly high unemployment will force the RBA to cut interest rates to a new low.

Breaking ranks ... the ANZ is predicting another interest rate cut. Picture: Supplied

ANZ has broken ranks with its major rivals to predict that stubbornly high unemployment will force the Reserve Bank to cut its benchmark interest rate by half a percentage point to a new low of 1.5 per cent.

ANZ’s economists had previously been in agreement with those at Commonwealth Bank and Westpac in expecting rates to stay on hold, albeit with some downside risk, as economic growth gradually accelerates.

But they now expect growth to be too slow reduce spare capacity in the economy.

“Pinpointing the timing of the cuts is tricky, but we are pencilling in 25 basis points cuts in February and May at this stage,” ANZ economists Warren Hogan and Justin Fabo said in a research note on Thursday.

That’s partly because of a lowered forecast for global economic growth and an expectation that the boost to the domestic economy from housing construction and the lower dollar will wane.

“With this backdrop, it is difficult to see how inroads can be made into an elevated unemployment rate,” they said.

Even if the unemployment rate is unchanged from its current level of 6.2 per cent for the coming two years that would be “very uncomfortable” for the central bank.

The jobless rate is more likely to worsen than improve, the ANZ economists said.

All eyes are on the Reserve Bank of Australia’s Govenor Glenn Stevens. Picture: Jack Tran

“The economic backdrop we have outlined above points to greater risk that unemployment worsens rather than improves over the next 12-24 months.” If the RBA’s governor Glenn Stevens goes down the “path of least regret”, he will need to cut rates again, they said.

CBA, Westpac and NAB were unmoved in their view that rates would remain on hold.

NAB senior economist David de Garis even said an increase at the end of 2016 was more likely than a cut, but CBA and Westpac still see risk on the downside.

“Undoubtedly there is a risk here that China’s growth may turn out to be a lot weaker than expected but, in terms of the supposed domestic settings, they do remain extremely stimulatory,” CBA senior economist Michael Workman said.

“And a currency near 70 US cents is much more beneficial than one near 80 US cents.” St George senior economist Hans Kunnen concurred, stressing that the impact of the lower Aussie dollar had yet to be fully felt. “It’s not a sugar hit, it's a slow burn,” Mr Kunnen said.

“A mixture of the current low interest rate, a weaker currency, stabilisation in China and ongoing growth in the United States should provide a decent backdrop for, not spectacular growth, but reasonable growth in 2016 that doesn’t warrant lower interest rates.”

Originally published as ANZ predicts the Reserve Bank of Australia will drop interest rates