Budget day rate cut on the cards for October: big banks

Two of the big four banks predict a budget day rate cut of 15 basis points could be on the cards, after Reserve Bank of Australia deputy governor Guy Debelle flagged the possibility on Tuesday. 

Speaking at an online event run by the Australian Industry Group on Tuesday, Dr Debelle discussed “further monetary policy action should the Reserve Bank board decide that it is warranted”.

Westpac and NAB, as well as St George and AMP Capital’s Shane Oliver, now anticipate the cash rate to be lowered to 0.10 per cent in the RBA’s October meeting at the earliest, while CBA expects rates to remain unchanged.

Westpac had previously saw a rate cut coming further down the track, though it changed its forecast today, predicting an October rate cut. NAB believes the rate cut could happen in October or November. 

Westpac chief economist Bill Evans said in an analysis today that Dr Debelle “gave a fairly clear hint” that the RBA would lower the cash rate at its board meeting on October 6, the same day as the federal budget announcement.

“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, adding that it was no longer appropriate for the RBA to be “sitting back” while assessing the budget, which was the norm in previous years.

Mr Evans said it was likely that boosts to government spending would be announced in federal and state budgets in the coming months, with the RBA’s rate cut expected to coincide with the federal budget.

The last rate cut was in March this year, when the RBA slashed the cash rate twice in one month to 0.25 per cent in response to COVID-19. 

At the time, lenders shaved their home loan interest rates within the week, though savings rates also came down.

“Open-ended” language could point to RBA’s next step

In his speech, Dr Debelle explored other options for monetary policy, including lowering rates “a little more without going into negative territory”.

“It is possible to further reduce these interest rates,” he said.

While the RBA governor Philip Lowe has explored the 0.10 per cent cash rate option before in a July speech, Mr Evans said this was largely in past tense, as opposed to Dr Debelle’s “open-ended” language. 

In his July speech, the governor also made it clear that: “The board has not ruled out future changes… if developments in Australia warrant doing so”. 

“It is reasonable to link these two commentaries together to conclude that the board is now ready to take the next step as described by the governor on July 21,” Mr Evans said.

He also observed a change in language from Dr Lowe in his September 2020 statement, in which he noted the possibility of “further monetary measures” for the first time since the March rate cuts.

“The board will maintain highly accommodative settings as long as is required and continues to consider how further monetary measures could support recovery,” Dr Lowe wrote at the time.

Economists believe October rate cut likely but CBA not convinced

NAB economists believe Dr Debelle’s speech provided “an explicit signal” that further monetary easing is likely to be imminent, with a cash rate cut to 10 basis points “most likely”.

The bank said any potential lowering of the cash rate would only have a marginal impact on the economy, but expects fiscal policy to be “well-placed to support the (economic) recovery”.

St George chief economist Besa Deda also noted a shift in tone in the deputy governor’s speech.

“The language of his speech suggested the RBA was very open and prepared to do more stimulus. It follows the RBA board meeting statement earlier this month, which also suggested the RBA was open to more stimulus,” she said in a report released today.

Meanwhile, Commonwealth Bank’s head of Australian economics Gareth Aird was not convinced that the cash rate would be cut.

“We expect the RBA to maintain the current monetary policy structure – but no policy options are ruled out, nor are they ruled in,” he said.

“It was always possible to reduce those rates, but at this stage we do not think the RBA has much appetite to do so.”

AMP Capital chief economist Shane Oliver was one of the first to flag a potential rate cut to 0.10 per cent down the track.

“We expect further easing by the RBA possibly at its next meeting so as to present a united ‘Team Australia’ front with the federal government as it’s the same day as the budget,” he said.

He also believed the RBA will continue ruling out negative interest rates, a view shared by CBA and NAB.

While the RBA has repeatedly stated in the past that negative interest rates are “extraordinarily unlikely”, Dr Debelle did not refer to this in his speech.

More stimulus expected for budget day

Dr Oliver expected an “eye-popping” deficit of about $230 billion for 2020-21, due to lower taxes and more spending on government stimulus anticipated to be announced on budget day. 

Despite the price tag, Dr Oliver believed the government made the right decision to pump money into the economy. 

“Fiscal stimulus has been necessary to protect businesses, jobs and incomes from the impact of the shutdown and associated uncertainty and without it, we would be seeing a much bigger hit to the economy and ultimately to the budget and a slower recovery.”

In his speech on Tuesday, Dr Debelle said while the size of the government measures in response to COVID-19 has been “extremely large”, it helped minimise Australia’s economic contraction.

“I would certainly think that the right decision is to err on too much support rather than too little support… I think the main point has been to provide the appropriate degree of support for the economy,” he said.

Dr Debelle defended the size of government stimulus packages, highlighting that household incomes did not fall in the coronavirus recession “because of the income support from the government through JobKeeper and JobSeeker”.

“Absent the fiscal stimulus, the economy would be significantly weaker and debt levels even higher,” he said.

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