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Westpac chief economist Bill Evans and NAB Group Economics have revised their monetary policy expectations, revealing that they now expect the Reserve Bank of Australia (RBA) to announce further cuts to the cash rate in the coming months.
This comes in response to remarks from deputy governor of the Reserve Bank of Australia (RBA) Guy Debelle, who conceded that further cuts to the cash rate were “possible” as a means to accelerating the economic recovery from the COVID-19 crisis.
Mr Debelle’s remarks were perceived by Mr Evans as a “clear hint” that the central bank is preparing to adjust its monetary policy settings in a bid to complement fiscal stimulus announced in the federal government’s Budget.
According to Mr Evans, the RBA is set to cut the overnight cash rate from 25 bps to 10 bps while also adopting a 10np three-year bond target, and adjusting the rate on new drawdowns of the term funding facility to 10bps.
Mr Evans also expects the central bank to reduce the rate paid on exchange settlement account (ESA) balances from 10bps to 1bp, creating a “significant incentive” for ESA holders to purchase bonds.
“That rate will be the key to driving the effective overnight cash rate to below 5 basis points – with a risk that it could print negative on certain days,” Mr Evans added.
The RBA is expected to supplement the rate reductions by allocating more its balance sheet to general purchases of Australian government securities and semi-government securities in maturities between five and 10 years.
“These purchases will be in addition to the funds required to defend the three-year bond target and will be a clear signal to governments that the bank is committed to play a key role in supporting their increased borrowings, which it has been encouraging,” Mr Evans said.
The Westpac economist said the central bank’s policy adjustments would form part of a coordinated effort between the central bank and federal and state governments, which are due to release their budgets in the coming months.
As such, Mr Evans expects the RBA to announce the changes on 6 October, the same day as the federal government’s budget announcement.
However, NAB Group Economics noted that the RBA may hold off on any changes until November, to ensure that it “communicates its messaging to a wider audience” undistracted by the government’s budget announcement.
NAB economists also stressed that while further cuts to the cash rate are expected, the RBA would refrain from employing negative interest rates, with the central bank previously stating that such a move would be “extraordinarily unlikely”.
[Related: RBA open to trimming record-low cash rate]