Terry McCrann: RBA holds fire, heads for Cup Day
As predicted, the RBA has kept the official interest rate unchanged and is now very likely to deliver a ‘rate cut plus’ on Cup Day, writes Terry McCrann.
Terry McCrann
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The Reserve Bank left its official interest rate unchanged on Tuesday — as I told you it would two weeks ago, after Westpac’s chief economist Bill Evans had joined the NAB’s Alan Oster in predicting it would cut this month.
Evans subsequently changed his prediction to the cut coming instead at the RBA’s next meeting in November on Melbourne Cup Day.
That not only makes more sense, it is now highly likely — albeit, not so much because an official rate cut would make much difference to anything; it would be from an all-but zero 0.25 per cent to a slightly closer to all-but zero 0.1 per cent.
But because it would be not just a rate cut now; in these ‘living-with-the-virus’ days, it’s become a ‘rate cut-plus’.
The RBA has two far more potent actions built on the (current) 0.25 per cent rate.
It is buying Commonwealth Government bonds out to three year terms to keep their yield in the market at or below the 0.25 per cent.
This both underwrites cheap borrowing for the government — the RBA’s more sophisticated version of the QE that all the major central banks have been doing since the GFC — and it also signals that the cash rate is likely to stay at (crucially, no higher than) that 0.25 per cent for that three year period.
To stress, by ‘stay’, I mean of course go no higher.
RBA governor Philip Lowe said explicitly in his statement on Tuesday that the RBA would not increase (my emphasis) the official rate until we were heading towards full employment and inflation was back up in the 2-3 per cent target range.
The second thing the RBA has done is to guarantee to lend banks up to $200bn at that 0.25 per cent – so they won’t be squeezed by having to borrow in global capital markets, to obviously on-lend at low rates to home buyers and business.
So if it did cut to 0.1 per cent, it would follow through by cutting the rate it charged the banks to 0.1 per cent and it would also step up its bond-buying to bring the yield down to 0.1 per cent.
It would also be likely to move to push that lower yield further out along the bond curve, to say five years bonds.
A cheaper rate to the banks would promote more and cheaper lending. Cutting bond yields would help the government as its debt heads towards $1 trillion with the huge budget deficits.
But the main game for the economy remains what the government did in Tuesday’s budget and what it does next year.
What adds to the likelihood of a Cup Day ‘rate cut-plus’ is that the RBA would not want to deliver it in December – too late into the critically important Christmas spending season, which has become even more critical, given the devastation across retail because of the lockdowns.
After that, the next RBA meeting isn’t until early February – a gap of four months from now which is like light years away in this extremely volatile world in which we now live.
Originally published as Terry McCrann: RBA holds fire, heads for Cup Day