Big 4 banks forecast October rate cut

By Cameron Micallef

September 24 2020
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Two of Australia’s largest financial institutions believe the Reserve Bank of Australia will reduce rates on 6 October to help support the federal budget due out the same day.

Westpac chief economist Bill Evans believes the RBA will cut the overnight cash rate to 10 basis points (0.1 of a percentage point), adopt a 10 basis point three-year bond target, and adjust the rate on any new drawdowns of the Term Funding Facility to 10 basis points.

“The prospect of the RBA ‘sitting back’ to assess the budget, which has been seen as the ‘norm’ in previous years, is not appropriate for these unique times,” Mr Evans said.

The comments follow RBA deputy governor Guy Debelle making the case for a potential reduction to the cash rate, while governor Philip Lowe has also hinted at changing the rate.

“It is reasonable to link these two commentaries together to conclude that the board is now ready to take the next step as described by the governor on July 21,” Mr Evans said.

“And note that since the governor’s speech, the minutes to the September board meeting have included a ‘new’ concept: ‘The board agreed to maintain highly accommodative settings as long as required and to consider how further monetary measures could support the recovery’.”

Mr Evans believes the shortfall in employment will be the primary driver of the RBA’s decision, with restoration of the full employment rate likely to be “in the far distant future”. That sentiment was echoed by NAB Group chief economist Alan Oster, who sees another cut coming either in October or November.

“While NAB remains of the view that further monetary easing will have only marginal impact on the economy, the RBA continues to signal that it will do what it can to support the recovery… Fiscal policy also continues to be well placed to support the recovery, and further measures are expected to be announced on this front in the budget on October 6,” Mr Oster said.

BetaShare’s chief economist David Bassanese believes Australia’s central bank could follow the United States, which has previously said it will remain lower for longer.

“The RBA is also likely becoming uncomfortable with the strength in the Australia dollar, particularly as other global central banks — such as the Bank of England and the Reserve Bank of New Zealand — have toyed with the idea of negative interest rates,” Mr Bassanese said.

“The US Federal Reserve has also recently pledged to keep interest rates at near-zero levels for possibly several more years, and which in turn has forced the European Central Bank to canvass possible further monetary stimulus to avoid undue strength in the euro.”

Mr Bassanese believes a currency war through cheap rates is currently taking place, with all central banks likely to reduce rates.

“A rate cut at the October 6 RBA board meeting would also complement likely further fiscal stimulus to be announced that same day in the federal budget. It will be a Team Australia day of co-ordinated policy stimulus,” Mr Bassanese concluded.

nestegg has previously reported how the strength of the Australian dollar means consumers are paying more for an iPhone .

About the author

Cameron Micallef

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron Micallef

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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