“The Board continues to consider how additional monetary easing could support jobs as the economy opens up further.”
Final sentence, Statement by Philip Lowe, Governor: Monetary Policy Decision, 6 October 2020.
David Plank, Head of Australian Economics at ANZ, is one of a number of senior bank economists who have taken the position the RBA will shortly reduce various interest rates at its next board meeting in early November.
“We take that as a clear indication the RBA will cut the cash rate to 0.1% when it next moves.”
He said the newly-added reference to “the high rate of unemployment as an important national priority” in the final paragraph “strongly suggests to us that the rate cut will come in November.”
He also expects the RBA’s 3-year target yield and the interest rate on the term funding facility (TFF) to be reduced accordingly, as well as a 5bps cut to the interest rate on exchange settlement balances.
While the RBA is already engaging in a form of quantitative easing via its targeting of the 3-year yield, Plank did not expect what he termed “pure QE” in the short term. However, he has “long thought that market dynamics will eventually force the RBA’s hand…”
Over at Westpac, Chief Economist Bill Evans had previously expected the RBA to make its move at the meeting. However, he revised his view last week to one where he thinks a November move is likely.
He said the “final sentence in the Statement will always be the one of most importance and noted the change in the September’s Statement from “additional monetary easing” to “further monetary measures” as “a stronger signal”. He also pointed to the reference to 3-year yields having fallen as telling. “It is my experience that central banks like to refer to market pricing when it is consistent with their own biases.”
As with ANZ’s Plank, he expects 15bps cuts to the cash rate target, the 3-year yield target and the TFF rate. However, he expects the exchange settlement balance rate to be cut to 0.01%.
UBS economist George Tharenou holds a similar view to Plank and Evans but with a twist. “Specifically, we still expect the RBA’s next meeting in November, when they “publish a full set of updated forecasts”, to cut rates from 0.25% to 0.1%…and lower the deposit rate from 0.1% to perhaps 0.05%.” He then said, “If the RBA don’t ease in November, it’s unclear what would be required to see them ease at all.”
Josh Williamson, a senior economist for Australia at Citigroup, is a dissenter. “In our preview, we mentioned that more dovish comments in the final paragraph were needed for us to switch to the rate-cutting camp. However, the guidance was unchanged…” He noted the “final sentence that was introduced in September was considered dovish” at the time but it “was only formalising the Governor’s public speeches over the past 12-months.”