There is increasing confidence that the central bank will reduce the cash rate next week, with the chief economist of the Commonwealth Bank of Australia (CBA), Stephen Halmarick, outlining that he believes the signal from the bank is that there will be a further push “conventional unconventional monetary policy space” next Tuesday (3 November).
While the official cash rate is currently at a record-low level of 0.25 per cent, it is generally expected that any reduction in the cash rate would likely be less than 25 basis points (the standard level at which the cash rate is adjusted) to avoid being zero.
Several economists had previously predicted that the central bank would drop the cash rate in October; however, several economists, including Westpac’s Bill Evans, revised this prediction after suggesting it would divert attention away from the budget 2020-21 announcement.
With the November board meeting taking place next week, CBA’s chief economist has outlined that he believes a rate cut is “all but certain”.
Mr Halmarick noted that RBA governor Philip Lowe recently made a speech in which he suggested that further monetary policy easing is coming.
Given this, Mr Halmarick noted: “This easing is expected to involve a cut in the three key interest rates – the cash rate target, the three-year bond yield target, and the term funding facility target from 0.25 per cent to 0.1 per cent.
“Critically, this easing of monetary policy is expected to be implemented at the same time as the RBA looks set to revise upwards their economic forecasts given the run of better economic data.”
Mr Halmarick added that monetary policy has a significant role to play in supporting the Australian economy by continuing to ensure very low borrowing costs, both for Commonwealth and state, are maintained for an extended period of time.
The economist also outlined that the record-breaking deficit announced as part of the federal budget would also help provide support to the economy.
He said: “The support being provided by fiscal policy to the Australian economy is a vital part of the path to recovery.
“This support has been enhanced in the budget through a combination of income support programs, health-related spending, income tax cuts, employment support programs, infrastructure spending and a focus on regional spending.
“While the level of government debt will continue to rise in the years ahead, now estimated to reach $966.2 billion by June 2024, representing a peak of 43.8 per cent of gross domestic product (GDP), the economic return on this debt will far exceed the interest costs.”
The CBA economist said the level of fiscal policy support could inevitably give the country’s economic recovery a much-needed boost, outlining that in 2020-21, the Australian economy is now only expected to contract by 1.6 per cent, while economic growth could rebound by as much as 3.5 per cent in the following year.
“Bottom line is that Australia should continue to outperform most other major OECD (Organisation for Economic Co-operation and Development) economies in recovering from the COVID‑19 recession,” he said.
[Related: RBA paves way for November cut]