Westpac is one of the first big four banks to predict that there will be a rate cut instead of a rate rise over the next 12 months.
In a statement released last week Westpac have predicted that the Reserve Bank will cut interest rates four times in 2012 due to the economy.
Bill Evans Westpac's chief economist felt that the first rate cut would come from offshore, and that it is not expected to be a one off. He further added that interest rates were too high in Australia due to the state of the non-mining sectors of the domestic economy, and a downward adjustment was required to avoid a damaging round of contraction.
Mr. Evans further added that they felt that there would be several rate cuts starting with a quarter percent in December 2011, and more in 2012 totalling 100 basis points, before rates will steady in 2013. This would slash the current standard variable home loan rate of about 7.8 per cent to 6.8 per cent.
The possibility of a rate cut was enhanced at the beginning of last week, after concerns were raised about the European sovereign debt crisis reaching a crucial level.
It is of the opinion that when the Reserve Bank meets in August that there is a one-in-three chance that there will be a rate cut, and the outlook for the next twelve months could mean that interest rates will fall from 4.75 per cent to 4.25 per cent according to Credit Suisse. Dr. Evans also stated that he did not expect to see a strong bounce back in confidence in the immediate future.
David Jones shocked the market earlier last week when they announced that they had downgraded their profit due to the retail industry being battered by weaker consumer spending and the rise of off-shore online competition.
Myer has also predicted lower profits.
The fact that Australians would rather pay their debts will also have an effect on the economic growth.
Dr. Evans also stated that the economy was going through a structural deleveraging by the household sector and that made consumer demand more susceptible to weakness.
Softening local house prices as well as falls on the global markets are also likely to impact consumers from further spending.
Westpac's consumer survey has also shown that households are becoming progressively more nervous about prospects for house prices. According to RP Data house prices have dropped by 2.7 per cent in the first 5 months.
Dr. Evans further suggested that housing was the major component of household wealth, and that would further undermine consumer spending.