Rate cut likely coming, but when?

Prospects of a new record-low RBA cash rate are continuing to firm, but economists and experts are split on whether a a 0.1 per cent cut will be announced this month, or in November.

Two in five respondents to Finder’s latest RBA Cash Rate Survey said they expect the official cash rate to be trimmed in the next two months, with 15 per cent of those forecasting a cut next week, and a further 25 per cent tipping a November cut.

The survey follows some of Australia’s biggest banks cutting variable home loan rates in recent weeks.

However, Finder insights manager Graham Cooke said a cut would be more symbolic than practical.

“The cash rate has dropped by 125 basis points over the last year and a half – a further fall of 15 is unlikely to make much of a difference beyond showing that the RBA is taking action,” Mr Cooke said. 

“Economists will be keeping a closer eye on community transmission of COVID-19 and the reopening of domestic borders than they will on the cash rate.”

CLSA Premium’s Peter Boehm agreed that reducing the cash rate would be a hollow move.

“While it might be tempting to reduce the cash rate, any reduction now would have little economic benefit and there would be no room to move if rates needed to be reduced during the next six months,” Mr Boehm said. 

“A wait and see approach would be the prudent course of action to take for now."

Macquarie University experts Geoffrey Kingston said he didn’t expect the RBA to cut rates prior to the federal budget being unveiled on Tuesday, while his colleague Jeffrey Sheen said the cash rate was at its effective lower bound, forecasting it to remain there until 2022.

On the other hand, AMP Capital’s Shane Oliver said further easing of monetary policy was warranted, as the RBA’s current forecasts indicated it does not expect to meet its current employment and inflation objectives over the next two years.

Mr Oliver’s view was supported by Corrina Economic Advisory’s Saul Eslake.

"The minutes of the last board meeting, and public comments by both the Governor and the Deputy Governor in recent weeks, suggest that the RBA is coming around to the view that there is more that it can do to support economic activity and employment, and to ensure that inflation eventually returns to the target band - and that it should do it,” Mr Eslake said.

Capital Economics' Ben Udy said it appeared that the RBA was coming around to his company's view that the pandemic will result in a sharp slowdown in wage growth and inflation, and a rate cut would be likely next week.

"We think that announcing more support alongside the budget would send a strong 'Team Australia' message and have penciled in a cut in the cash rate target, the 3-year yield target, and the TFF interest rate to 0.10 per cent at the bank’s October meeting," Mr Udy said.

"We also expect the bank to announce more bond purchases next week."