RBA keeps interest rates at 0.25% in October

Despite speculation that an October rate cut was in the cards, the Reserve Bank has left official interest rates on hold in its meeting this afternoon. The cash rate remains at the historic low of 0.25%.

“A recovery is now under way in most of Australia, although the second-wave outbreak in Victoria has resulted in a further contraction in output there,” said RBA governor Philip Lowe in his post-meeting statement. 

“Labour market conditions have improved somewhat over the past few months and the unemployment rate is likely to peak at a lower rate than earlier expected. 

“Even so, unemployment and underemployment are likely to remain high for an extended period. Wage and inflation pressures remain very subdued.”

Lowe once again ruled out an increase to the cash rate until the outlook for inflation and employment is in line with the Board’s targets. According to past statements, this isn’t likely to be met for another three years.

While the Board has shown a clear bias against negative interest rates, taking the cash rate below its current setting but above zero has been floated as one way to put the economy on a quicker path to recovery.

Another option is a more traditional quantitative easing program, which would involve maintaining the current three-year yield target while also conducting purchases further out along the curve.

As for the Board’s term funding facility, which received a boost following last month’s policy meeting, Lowe said it continues to support the flow of credit to households and businesses. 

So far, $81 billion in low-cost funding has been drawn from the facility.

Will the RBA cut this year?

Although the hit to the economy has been less severe than initially expected, the slow pace of recovery has given rise to calls for further policy support, with many analysts betting a 15 basis point cut will come in November.

Holding off until then would clear the stage for the government to promote its federal budget, due to be announced later tonight, and allow the Board to incorporate the projected $25 billion in government funding into its economic forecasts.

The behaviour of banks and lenders in recent weeks also suggests many believe expect further monetary easing is around the corner.

“The pace of cuts to particular deposit rates, but also home loan rates, suggests that lenders are not seeing a flat line for the next few years. They’re seeing another drop,” said Mozo’s banking expert Peter Marshall.

But how will banks and lenders respond if the RBA pulls the trigger? According to Marshall, there’s a good chance that the majority will rally behind the policy decision and cut home loan rates in full.

“They won’t want to be seen as standing in the way of whatever government or RBA program is being initiated. They’ll want to be seen as supporting the economic strategy as much as possible,” he said.