Summary: Cash futures imply a cash rate near 0.10% through to end 2021; gap exists between cash rate and RBA target rate; speech by RBA official sparks expectation of move in October; chief economist at “big four” banks spilt.
Cash futures prices have been steadily creeping higher in recent months, implying a lower path for the overnight cash rate over the next 18 months was being factored in by traders. At first glance, this behaviour seemed to indicate the RBA was likely to cut its cash rate target.
The gap between the RBA’s target rate and the actual rate had been miniscule for years, reflecting a belief the RBA would add or subtract cash from the market should the gap open up. However, since late March, the amount of cash in the system has exceeded the amount required to keep the actual rate close to the target rate. A small gap opened up, at first just a basis point or two. Then the gap became wider as cash held by banks and other institutions at the RBA built up. Yet, the RBA did not soak up the extra cash. In contrast, it continued to add cash to the system by buying Commonwealth bonds and semi-government bonds. Additionally, it did not change the target rate.
Currently, the actual cash rate is around 0.13% and the RBA’s target rate is still 0.25%. This situation may be about to change according to some economists.
The catalyst for the change came in a speech by Deputy Governor Guy Debelle’s speech to the Australian Industry Group on Tuesday.
In the speech, Debelle covered three topics: the current state of the economy, actions taken by the RBA to support the economy and further actions which could be taken if warranted. It is the third topic, further actions, which sparked the expectation the RBA will move shortly to cut its target rate and possibly start a quantitative easing (QE) programme.
Debelle opened this section of his speech by stating, “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.”
Four options were discussed. The first was for the RBA to buy bonds with longer maturities than those currently being purchased to peg the 3-year yield at 0.25%. The second was to intervene in the foreign exchange market by selling Aussie dollars and buying other currencies.
“A third option is to lower the current structure of rates in the economy a little more without going into negative territory…It is possible to further reduce these interest rates.”
A fourth option, negative interest rates, was also discussed but Debelle said the “evidence on negative rates is mixed” while noting economies with negative rates had not lowered them any further, using other options instead.