RBA interest rates in October: don’t discount a future rate cut just yet

Although the Reserve Bank’s October meeting isn’t likely to bring a change in interest rates, things aren’t as cut and dried as they might seem, and an even lower cash rate could still be in our future, according to Mozo Data Manager Peter Marshall.

Experts are overwhelmingly predicting that we won't see any change from the RBA in October, with the ASX chancing in a rate change at 0%. But beyond that, things are less clear.

According to Marshall, “October has a bit of a reputation for being a dangerous month, economically speaking, and any major shocks during the month could mean that the RBA is prompted to move sooner than expected.”

But if we get through October without any economic upheaval Marshall said it could easily be another six months before the Reserve Bank makes a move.

The next question is, when rates do change, will it be an increase or a cut? RBA Governor Philip Lowe has recently flagged that interest rates will likely go up before they go down, a sentiment echoed by three major banks.

CBA is predicting one rate rise in the coming year, while big banks ANZ and NAB have predicted two rate rises in 2018, banking on growth and inflation picking up while unemployment drops.

On the other hand, Westpac chief economist Bill Evans recently said the Reserve Bank’s outlook was generally ”overly optimistic” and that the official cash rate could stay put until at least mid-2019.

Marshall said he was inclined to agree with Evans and other economists who have said the RBA’s position may be too optimistic.

“While the general consensus seems to be pointing toward a rate increase being the next move, there’s still plenty of respected economists taking the opposite view - and to some extent, I think they’re right,” he said.

“The RBA’s outlook relies on global conditions staying level and no big upsets affecting the market. It’s a prediction for if everything goes as well as it possibly could. But historically, things rarely go that smoothly.”

Marshall explained that there are still many economic risk factors that could lead to a rate cut and that in terms of the global economy, we’re in “a reasonably unstable period.”

“It’s been a decade since the GFC, and you could argue we’re due for another big financial crunch,” Marshall said.

“After the Global Financial Crisis, it was incredibly hard to get a loan for any reason. But as the economy recovered, we kind of opened the floodgates to lending. That leaves us with an enormous amount of risk in the market if things go wrong.”

In the worst-case scenario, Marshall said, we could even be looking at another financial crisis - but there’s no reason to panic just yet.

“Between now and next year, a lot could have changed. Despite the general feeling that rates can only go up from here, the outlook is actually far from clear.”

Make sure you check our RBA announcement page to see if there is surprise change on Tuesday, and how it will affect your budget for the coming month.