Reserve Bank keeps cash rate stable, experts predict November drop

The Reserve Bank of Australia again agreed to keep the official interest rate at an all-time low of 0.25% at its monthly meeting – unchanged since late March.

A number of economists had predicted that there could be a reduction in cash rate and yield curve targets on Tuesday to help stimulate the economy hit by COVID-19, but the bank has remained stable.

Now, experts are predicting instead that the bank will assess the measures in the federal budget presented on the same day before making a change next month instead, with some disappointed by the delay.

“I think it would have been better if the Reserve Bank had cut rates for the simple reason that by cutting rates on the same day as the federal budget, they would get their money’s worth,” said Shane, chief economist. from AMP Capital. Olivier.

“It would have given the impression of another Team Australia event – much like March – where we had the two branches of politics working in the same direction. The Reserve Bank has said on several occasions that it is considering d ‘lower the rate and I think she will do it now in November, but that would have had a bigger impact on the same day that the stimulus package was announced in the budget. ”

The Reserve Bank’s board of directors, responsible for formulating monetary policy, could have chosen to cut the rate with the intention of providing more domestic stimulus to an economy that is currently experiencing its sharpest contraction in years. 1930.

While the government is expected to announce a series of budget measures in its budget arsenal, such as tax cuts and infrastructure spending, some economists believe the two together could give the country its best chance of coming out of a crisis sooner. recession.

“But the Reserve Bank instead decided to wait until November and see what the government has done with the budget and then figure out how best to support the economy, signaling the possibility of lower rates at that. time, “said Alex Joiner, chief economist at IFM Investors.

“Most people expect interest rates to drop a bit, which will help people from a cash flow perspective manage their mortgages, make them cheaper, and help others pay off. enter the housing market. But will it help business investment and create more jobs? “

With the target spot rate – the market interest rate on overnight funds – already so low, the Reserve Bank appears to want to hold back its fire for later.

Tim Reardon, chief economist at the Housing Industry Association, said: “Given all the uncertainty in the economy right now, they have decided to hold on for now.

“Interest rates are one of the few levers that remain, and the cabinet must now use the tools at its disposal before the Reserve Bank uses its tools. All the interest should now be on the fiscal side, and the only tools that will help are migration and spending. “

Sean Langcake, senior economist at BIS Oxford Economics, says a rate cut may not have made much of a difference anyway.

“The main obstacle facing the economy is lack of demand, so a minor change in the interest rate is unlikely to have a huge effect on growth dynamics. The main game really is what measures fiscal policy can provide.

“But the Reserve Bank is keeping its policy parameters at a really accommodating level. It will be a long time before inflation and the unemployment rate are on the right track, so we will not see any change in policy parameters for some time. “

NAB Group chief economist Alan Oster is even more blunt about the Reserve Bank’s decision to keep, about its option to cut.

“It really doesn’t matter,” he said. “To be bluntly honest, the big thing now is fiscal policy; it is not monetary policy. The Reserve Bank is trying to make sure there is plenty of liquidity, but it’s not a matter of supply at this point, it’s a matter of demand.

“The incentive isn’t to borrow because the spot rate could be a few points lower – that’s hogwash. The big picture today is the budget. If the Reserve Bank can help, they will, but there isn’t much they can do. “

By keeping the current rate stable, this means that the Reserve Bank still has some leeway if the situation worsens. If he had cut rates now, having already indicated that he did not want to enter the uncertain world of negative interest rates, he would have almost exhausted what he could do for the economy in the future.

“Now the Reserve Bank still has leverage to pull on the interest rate side,” Reardon said. “They still have tools in their arsenal.”

And Mr. Oster agrees. “The Reserve Bank once said there won’t be negative rates, so now there is still something it can do effectively to help the real economy.”