Market consensus is now evenly split on whether the RBA will adjust the cash rate in October or November, according to Brian Reid, treasurer of Newcastle Permanent, who pointed to the speech given by RBA Deputy Governor Debelle which has caused a number of banks to revise their views on the near term outlook for monetary policy.
Rather than another full 25 basis point cut, it seems most market participants are anticipating some version of “micro easing” such as:
- Lowering the official cash rate from 25bps to 10 bps
- Reducing the interest rate RBA pays on retail banks cash balances held at the Reserve from 10bps to 5bps
- Lowering the three-year bond target from 25bps to 10bps
- Adjusting the rate at which banks can borrow from the RBA using the Term Funding Facility (TFF) from 25bps to 10bps
“Consequently financial markets are now anticipating a roughly 50% chance that the RBA will cut the official cash rate before the end of the year,” Reid said.
However, the treasurer stressed “consensus on RBA actions is by no means universal”.
“The support for further easing appears opposed to the long held market view that additional monetary policy stimulus off such low levels will deliver marginal impact on the economy,” he explained.
“However, those favouring further loosening of monetary policy point to the importance of the RBA signalling that it will do what it can to support the recovery.
“Proponents of the status quo point to the recent increase in the size of the TFF which the central bank considered, ‘a further easing in the stance of monetary policy’, a stabilising domestic economy and the risk that additional adjustments to interest rates will adversely impact consumer confidence."
Some view additional easing of monetary policy from the RBA to be part of the Federal Budget, which is soon to be announced and expected to be bold.
“This is consistent with the broader RBA position that most of the heavily lifting to support an economic recovery needs to come from fiscal policy,” Reid said.
“Irrespective of the outcome, the final three months of the year are shaping up as incredibly important from a monetary, fiscal, and political perspective: possible RBA announcements in October and November and the Commonwealth Budget in October are expected to set the tone for the economic recovery into the next election.”