Westpac now expect RBA to cut in October: Bill Evans

EXPERT OBSERVER

In a speech yesterday the Deputy Governor of the Reserve Bank 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 Bank is also likely to extend its objectives for bond purchases to include general support for the Australian and semi government yield curves in the five to ten year maturity range. It is likely to leave this commitment open ended at this stage.

We have discussed these issues in previous notes but did not expect the action as soon as the next Board meeting as now seems to be the case.

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.

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.

We now expect the RBA to cut the overnight cash rate to 10 basis points; to adopt a 10 basis point three year bond target; and to adjust the rate on any new drawdowns of the Term Funding Facility to 10 basis points. All these rates are currently set at 25 basis points , which the Governor has generally described as the effective lower bound for the cash rate.

The Bank is also likely to reduce the rate which the Bank pays on Exchange Settlement Account balances from 10 basis points to 1 basis point.

If the banks are only earning 1 basis point on their ESA balances there will be significant incentive to purchase bonds, even if the bond is only yielding 10 basis points, or lend to the private sector.

BILL EVANS is Westpac's chief economist