Westpac flags interest rate cut but other banks uncertain

Westpac is predicting a 1% cut to interest rates, putting it at odds with the other major banks, as low consumer sentiment continues to hurt business confidence.

According to Westpac, the cash rate of 4.75% is expected to fall by 1% by the end of 2012 due to global instability and slumping consumer sentiment.

This is in contrast to the other big banks, which expect rates to remain on hold or rise. ANZ, for example, predicts the Reserve Bank will hold rates steady for at least six months before raising them in early 2012.

Bob Coombe, who heads home and small business lending at Westpac, says businesses outside mining and agriculture continue to struggle.

According to Coombe, mining and agriculture are benefitting from high commodity prices, but retail, tourism, education and construction are doing it tough.

“Businesses are feeling real stress out there at the moment… It’s more fragile than a lot of people would think,” Coombe says.

While unemployment is still low at 4.9%, consumer and business confidence are at levels not recorded since the global financial crisis.

The latest Westpac-Melbourne Institute Index of Consumer Sentiment reveals consumer sentiment has hit a two-year low as concerns escalate about the European financial crisis, the ongoing impact of interest rate rises and the carbon tax.

The Westpac-Melbourne Institute Index of Consumer Sentiment fell by 8.3% in July, from 101.2 points in June to 92.8 points.

“The only other time in recent history when the index has been sustained around the current level was during the period following the GST introduction, which coincided with the bursting of the dotcom bubble,” Westpac economist Bill Evans said in a report.

The report comes on the back of a business sentiment survey by NAB, which shows business confidence deteriorated sharply in June.

“Conditions in retail fell to worryingly low levels while manufacturing, construction and wholesale were again poor,” the report reveals.

“The high Australian dollar, continued cautiousness of households and concerns about the global outlook appear to be eroding sentiment, with weak confidence reported in construction, manufacturing, retail and wholesale.”

Coombe says if low consumer sentiment continues, interest rates could be cut, although it isn’t clear when this might happen.

“We were all talking not long ago that rates could go up, but if the consumer sentiment remains subdued there may be interest rate deductions and if that occurs that would be a very strong stimulus for the consumer to save less and spend a little bit more,” Coombe says.