Will the RBA cut interest rates in December?

By Niko Iliakis ·

The RBA’s final meeting of 2019 is only a few days away, and while there’s been some chatter about a potential cut, markets are fairly confident that the cash rate will be kept on hold in December, leaving February as the more likely date.

“The RBA observed that their June-July double act caused a bit of consumer stress. I think they’d be reluctant to risk upsetting the apple cart in the lead-up to Christmas,” said Mozo’s banking expert, Peter Marshall.

How is the economy faring?

While the wheels haven’t exactly come off, things aren’t running too smoothly either. Since the RBA began cutting interest rates back in June, it’s had to contend with seesawing employment figures and an inflation rate that remains anchored well below its target range of 2-3%. 

At the same time, household debt has reached record highs, and with RBA Deputy Governor, Guy Debelle recently talking down the prospect of a lift in wages, many Australian households are finding themselves in an increasingly vulnerable position.

All this very nearly led the RBA to break with its usual wait-and-see approach this month, with minutes from its last meeting revealing the board seriously considered bringing official interest rates down to 0.50% in November.

How low will interest rates go?

With the cash rate currently sitting at 0.75%, the RBA has three more cuts in the chamber before it hits the zero mark. But the chances that it will drop even further are extremely slim.

At a recent Australian Business Economists event in Sydney, RBA Governor Lowe left no doubt about his position on negative interest rates, stressing that while several countries around the world have adopted the unconventional policy, Australia is unlikely to follow suit.

“It has become increasingly apparent that negative rates create strains in parts of the banking system that can impair the ability of some banks to provide credit,” he said.

“In addition, there is evidence that they can encourage households to save more and spend less, especially when people are concerned about the possibility of lower income in retirement.”

Surprisingly, Dr Lowe revealed he isn’t particularly eager to resort to quantitative easing either, ruling it out as a possibility until interest rates reach at least 0.25%, and even then limiting its scope to the purchase of government securities rather than private assets. 

"There may come a point where QE could help promote our collective welfare, but we are not at that point and I don't expect us to get there," he said.

What will banks do when the RBA does cut?

So if the RBA is likely to lower official interest rates early next year, how can we expect banks to respond?

“I think it will be pretty similar to the changes we saw in the last cut, where somewhere around half of the 25 basis point cut will get passed onto borrowers, and probably about the same for depositors,” said Marshall.

“Deposit rates are so low that banks are struggling to attract deposit funds now. They need to make sure that they are getting new deposits in the door to make up for the funds that they’re losing.”

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