One of Australia’s leading economists says a change in wording by the Reserve Bank could signal a potential future rate cut.
One of Australia’s leading economists says a change in wording by the Reserve Bank could signal a potential future rate cut.

RBA provides clue to future rate cut

One of Australia's leading economists says the Reserve Bank of Australia is hinting it may enact another interest rate cut if the country's recession further deepens.

Westpac chief economist Bill Evans says the central bank has provided clues it is considering a potential interest rate carving in order to support the country's economic recovery.

Minutes from the RBA's monthly board meeting on monetary policy have revealed a change in wording, with the bank saying it will "continue to consider how further monetary measures could support the recovery".

Westpac chief economist Bill Evans says the central bank has provided clues it is considering a potential interest rate. Picture: Britta Campion / The Australian
Westpac chief economist Bill Evans says the central bank has provided clues it is considering a potential interest rate. Picture: Britta Campion / The Australian

It is the first time since March the central bank has signalled a potential change in the current policy settings.

The onset of the coronavirus pandemic forced the RBA to initiate emergency rate cuts to alleviate downward economic pressures facing the economy due to the health crisis.

"This is the first time since the major policy changes in March that the board has noted the possibility of further monetary measures," Mr Evans said.

"That could mean even more easing of the current policy stance or a new approach to policy easing."

Westpac flagged the central bank could cut the cash rate to 0.1 per cent but would be reluctant to push rates into the negative territory.

"I do not think the RBA is even close to such a move which would likely require intervention or negative rates," Mr Evans said.

"That debate is more likely to emerge in 2021.

Other overseas central banks such as the Reserve Bank of New Zealand are floating the idea of a negative interest rate to curb the impact of the economic downturn sparked by COVID-19.

RBA governor Philip Lowe has ruled out Australia moving to a negative interest rate position, saying current measures are providing ample support.

The RBA has hinted it may change current monetary policy settings. Picture: NCA NewsWire / Jeremy Piper
The RBA has hinted it may change current monetary policy settings. Picture: NCA NewsWire / Jeremy Piper

Australia's official interest rate currently sits at 0.25 per cent.

The RBA also introduced a term funding facility that is pumping cheap liquidity into the banking system.

Cheaper liquidity ensures banks are able to pass on the cheapest rates to businesses and customers looking to borrow money.

Mr Evans said a potential fire sale of houses and unemployment hitting the upper bounds of expectations could prompt a rethink of the current settings.

"The RBA may be concerned that the nascent recovery in housing will be severely impacted by a surge in distressed sellers in the housing market in 2021 once lenders insist on a resumption of payments, he said.

Reserve Bank governor Philip Lowe lowered the official interest in March to 0.25 per cent due to the coronavirus pandemic. Picture: Joel Carrett/ AAP
Reserve Bank governor Philip Lowe lowered the official interest in March to 0.25 per cent due to the coronavirus pandemic. Picture: Joel Carrett/ AAP

"Another reason why the RBA might be disposed to further stimulus is that it is forecasting that the unemployment rate is set to increase to 10 per cent by December from the current 7.5 per cent."

A potential rate cut would also place downward pressure on the Australian dollar, which is trading at sustained highs above 73 US cents.

As part of its additional monetary policy measures, the central bank is buying government and some large corporate bonds, which is also designed to inject more liquidity into the economy.

The latest value of bought bonds is about $60 billion, with the central bank buying three-year bonds to achieve a yield target of 0.25 per cent.

Originally published as RBA provides clue to future rate cut


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