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Westpac chief economist Bill Evans recently revised his monetary policy expectations, stating that he expected the Reserve Bank of Australia (RBA) to announce further cuts to the cash rate by as soon as 6 October during the RBA board meeting.
This would have coincided with the federal government’s budget announcement in what he called a “team Australia” moment.
However, Mr Evans has backtracked from this view, stating that this could divert attention from the budget.
“A central bank moving on budget day could be interpreted by the government and the bank itself as diverting attention away from the budget and complicating the government’s task in ‘selling’ the budget,” he said.
As such, Mr Evans has now predicted that any change in the official cash rate could occur on 3 November, which he said would give the government enough time to sell its budget without any distractions from monetary policy announcements.
Mr Evans’ original prediction was based on his interpretation of remarks from RBA deputy governor Guy Debelle, who said that further cash rate cuts were “possible” as a way to accelerate the economic recovery from the COVID-19 crisis.
Mr Evans believed this was a “clear hint” that the RBA was set to complement fiscal policy announcements with an adjustment to its monetary policy settings.
“Central banks are influenced by and aim to influence expectations. For our ‘team Australia’ theme to have been viable, we needed to see expectations and support for the concept build over the course of last week following Dr Debelle’s speech on Tuesday and our note on Wednesday,” he said.
“That has not happened.”
Mr Evans admitted that it was unprecedented for monetary stimulus measures to be announced on the same day as the budget, with the budget usually scheduled for the second Tuesday of the month while the RBA board meeting occurs on the first Tuesday of the month.
“But the current crisis is without precedent as the blowout in the budget deficit from $1 billion in 2028-19 to $85 billion in 2019-20, to an expected $230 billion in 2020-21 testifies,” he said.
According to official forecasts, the unemployment rate is set to rise to 10 per cent by the end of the year and only reduce to around 7 per cent by the end of 2022.
Mr Evans said that it is very unlikely that the RBA will lower its 7 per cent forecasts for the unemployment rate by end 2022 as a result of the contents of the budget.
“As we discussed last week, the arguments for the RBA not changing policy near a budget due to the need to assess the contents of the budget did not stand up, especially in a crisis period,” Mr Evans said.
Mr Evans still expects the RBA to announce various policies on 3 November, including cutting the official cash rate to 0.1 per cent, the three-year target bond rate to 0.1 per cent, and the rate on the term funding facility (TFF) to 0.1 per cent.
Industry split on RBA moves
He has received support for his revised forecasts, with aggregator Finsure Group managing director John Kolenda expecting action from the RBA on 3 November, stating that it would be prudent for the RBA to digest the federal budget measures before announcing any monetary policy measures.
However, he predicted that while lower rates might provide some relief for mortgage-holders, it may not significantly impact the economy.
“We need further investment into the economy from the federal government by way of more economic stimulus, infrastructure spending, tax reform and business incentives,” Mr Kolenda said.
“These are the sort of packages that are required to help the economy. The RBA reducing rates any further at the moment would have little impact on the economy and stimulating an aggressive recovery on its own.”
However, Newcastle Permanent treasurer Brian Reid said consensus on RBA taking action before the end of the year is not universal, with market consensus evenly split on RBA moves.
“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,” Mr Reid said.
“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.
“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.”
Mr Reid added that additional monetary easing would provide support to what is predicted to be a “bold” budget, in line with the RBA’s position that fiscal policy should do most of the heavy lifting to support the economic recovery from the COVID-19 crisis.