Westpac Sticks to Interest Rate Cuts

Inflation aside, Westpac (ASX:WBC) still expects interest rates to drop next adjustment.

Yesterday's inflation numbers caused economists to predict a rate hike before the end of 2011. The consumer price index rose 0.9 percent, far above the Reserve Bank's target quarterly rate. The dollar rose US1.5 cents to a record US$1.108 last night.

Regardless, Westpac is behind chief economist Bill Evans' prediction that the RBA would cut interest rates. According to his statement on July 15, rates could drop 100 basis points over the next 12 months due to weak consumer and fears of European debt.

The bank also pointed to the mining sector as the top source of inflation pressure.

"There's discomfort in the CPI figure for someone predicting rate cuts, because with all things being equal the RBA would tighten rates," said senior economist Huw McKay.

"However, we see a historically subdued consumer who is anxious about lots of things, including household finances, due to rising food and fuel prices."

On July 12, market pricing was in anticipation of more than one rate reduction before the year ends and a drop in cash rate from 4.75 percent to 4.42 percent.