Federal budget day RBA cash rate cut on the cards

Market betting has swung firmly behind the RBA cutting interest rates at its October 6 board meeting.

Market betting has swung firmly behind the RBA cutting interest rates at its October 6 board meeting. Picture: AAP

Market betting has swung firmly behind the Reserve Bank cutting interest rates and potentially starting full-blown quantitative easing at its October 6 board meeting in what some economists are calling a “Team Australia” moment to support a stimulatory federal budget on the same day.

Influential Westpac chief economist Bill Evans has become the latest to tip that the RBA will cut rates and launch QE in less than two weeks, adding to National Australia Bank chief economist Alan Oster’s prediction on Tuesday of a fresh round of easing.

Cash rate futures late on Wednesday were tipping a 75 per cent chance of an interest rate cut at next month’s board meeting, up from 65 per cent on Tuesday.

Together with a further rise in the US dollar and sharemarkets, a fall in iron ore prices and a shift by other economists to the RBA easing camp after a dovish speech by deputy governor Guy Debelle on Tuesday, Mr Evans’ prediction pushed the dollar down 0.8 per cent on Wednesday to a six-week low of US71.13c.

It also triggered a rally in bonds, with the yield on Australia’s benchmark 10-year commonwealth government bond falling as much as seven basis points to a five-month low of 0.773 per cent intraday.

The sharemarket, meanwhile, added $38bn in value as the benchmark S&P/ASX 200 index surged 140 points, or 2.4 per cent, to a nine-week high daily close of 5923.9 points.

Following a similar move on Wall Street, the local market broke a four-day losing streak, with economic reopening trades including Flight Centre, Car­sales.com, Transurban, REA Group, Sydney Airport, Qantas, Star Entertainment, Webjet and Super Retail Group among the best performers as Victorian Premier Daniel Andrews indicated it may be possible to ease some coronavirus-related restrictions earlier than planned.

Westpac’s Mr Evans said the central bank would cut its official cash rate, three-year bond yield and term funding facility targets to a historic low of 0.1 per cent, from 0.25 per cent, cut the rate it paid banks on exchange settlement account balances to one basis point, and broaden its bond buying with an open-ended commitment to support Australian and semi-government bonds in the five to 10-year range.

He said Dr Debelle “gave a fairly clear hint that the board is set to cut the cash rate and other key policy rates at its October board meeting”.

“The theme is likely to be, as we saw in March, a Team Australia moment where the Reserve Bank is directly supporting a bold federal budget,” Mr Evans said.

“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.”

In his speech on monetary policy and the economy on Tuesday, Dr Debelle outlined the “possibilities for further monetary policy action should the Reserve Bank board decide that is warranted”.

“Given the outlook for inflation and employment is not consistent with the bank’s objectives over the period ahead, the board continues to assess other policy options,” he said.

Dr Debelle noted that “a lower exchange rate would definitely be beneficial for the Australian economy, so we are continuing to watch developments in the foreign exchange market carefully”.

After weekly payrolls data for the fortnight to September 5 indicated that more than 100,000 jobs had been lost since early August, preliminary retail trade sales data dived 4.2 per cent to $29.4bn last month as a collapse in spending in locked-down Victoria led declines across the country.

BetaShares chief economist David Bassanese said the RBA “probably feels it needs to be seen to be doing something to support business and consumer confidence at this delicate stage of the economic recovery, particularly given the setback caused by Melbourne’s return to lockdown”.

Mr Bassanese said the RBA was also probably becoming uncomfortable with the strength in the dollar, particularly as other global central banks — such as the Bank of England and Reserve Bank of New Zealand — had toyed with the idea of negative interest rates, and the US Federal Reserve had also pledged to keep interest rates at near-zero levels for several years, forcing the ­European Central Bank to canvass possible further monetary stimulus to avoid undue strength in the euro.

“In short, the global central bank currency war — where each is competing to have a cheap currency via very low interest rates — continues, and the RBA likely feels it has no choice but to enter the fray,” Mr Bassanese said.

“A rate cut at the October 6 board meeting would also complement likely further fiscal stimulus in the October 6 federal budget. It will be a “Team Australia” week of co-ordinated policy stimulus.

“But to my mind, further monetary rate cuts will do little to actually provide further stimulus to the economy at this stage, and risks creating further distortions in asset prices — such as housing and shares.”

RBC chief economist Su-Lin Ong stuck to her call for the RBA to cut its official cash rate, three-year bond yield target and term funding facility rate in the 2021 March quarter rather than next month.

“Renewed labour market weakness and easier global policy settings in the first half of 2021 will be the likely triggers, with the trajectory of the currency also an important factor,” Ms Ong said.

While “intensified market speculation of earlier easing could force the RBA to deliver even sooner”, she said the RBA was a “reluctant player in the unconventional policy space”.

And while a separate bond-buying program of longer-duration bonds remained an option, “this would be a significant step for the RBA, which has, thus far, been reluctant to buy more bonds than necessary with yields already historically low”.

TD Securities has also joined the RBA rate cut bandwagon, senior APAC rates strategist Prashant Newnaha noting that the RBA had indicated every month since July that it did not rule out changes to its mid-March package if conditions warranted, and officials had expressed low confidence on hitting its unemployment and inflation targets. “We now expect the RBA to act at next month’s meeting,” he said.

“None of the options the RBA detailed to ease policy further are optimal, but RBA bond purchases out along the bond yields curve, cutting the three-year bond target yield from and term funding facility rate target to 10 basis points is what the RBA is likely to deliver in unison.”