RBA Newsflash – October 2020


Updated October 6th 2020

Frank Schiraldi

Interest rate announcement:
Reserve Bank holds cash rate steady, experts predict November cut

A number of economists had forecast there might be a cut in the cash rate and yield curve targets on Tuesday to help boost the COVID-19-hit economy, but the bank has remained steady.

The Reserve Bank of Australia has again agreed to hold the official interest rate at the historic low of 0.25 per cent at its monthly meeting – unmoved from late March.

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

Perhaps it would have been better for the Reserve Bank to cut rates for the simple reason that, by cutting rates on the same day as the federal budget, they would get bigger bang for their buck.

It would have given the impression of another Team Australia event – much like back in March – where we had the two arms of policy working in the same direction. The Reserve Bank has said on numerous occasions that it was considering easing the rate and I think they will now in November, but it would have had a bigger impact coming on the same day as the announcement on stimulus measures in the budget.

The Reserve Bank board, responsible for formulating monetary policy, could have chosen to cut the rate with the intention of providing more domestic stimulus for an economy which is currently experiencing its biggest contraction since the 1930s.

With the government expected to announce an array of budget measures in its fiscal armoury, like tax cuts and infrastructure spending, some economists believe the two together could give the country its best chance of climbing earlier out of a recession.

But the Reserve Bank has decided instead to wait until November and see what the government has done with the budget and will then work out the best way it can support the economy, signalling the possibility of lower rates then.

Most people expect interest rates will move a little lower then which will assist people from a cash flow perspective in managing their mortgages, making them cheaper and helping others get into the housing market. But will it help business investment and create more jobs.

With the target cash rate – the market interest rate on overnight funds – already so low, the Reserve Bank seems to want to hold its fire for later.
Given all the uncertainty in the economy at the moment, they’ve decided to hold for the moment.

Interest rates are one of the few levers left, and the cabinet now has to 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 expenditure.

A cut in the rate may not have made much difference anyway.

The major headwind facing the economy is lack of demand so a minor change in the interest rate would be unlikely to have a huge effect on growth momentum. The main game is really the measures that fiscal policy can deliver.

But the Reserve Bank is keeping its policy settings at a really accommodative level. It’ll be a long time before inflation and unemployment rate are on track so we’ll see no change in policy settings for quite some time.

It really doesn’t matter, to be honest, the big thing now is fiscal policy; it isn’t monetary policy. The Reserve Bank is trying to make sure that there’s lots of liquidity out there but it’s not about supply at this point, it’s all about demand.

The incentive isn’t borrowing because the cash rate could be a few points lower – that’s garbage. The big picture today is the budget. If the Reserve Bank can help, they will, but there’s not much they can do.

By holding the current rate steady, it means that the Reserve Bank still has some room to move if the situation worsens. If it had cut the rate now, having already indicated that it doesn’t want to enter the uncertain world of negative interest rates, it would have almost exhausted what it could do for the economy in the future.

Now the Reserve Bank still has levers to pull on the interest rate side, they still have tools left in their arsenal.

The Reserve Bank has already said there won’t be negative rates, so now there’s still something left they can effectively do to help the real economy.