October rate cut a certainty as economy shows further signs of weakness

By Niko Iliakis ·

The Reserve Bank’s monthly meeting is just around the corner, and financial markets are confident that we’ll have another rate cut on our hands. 

If the RBA does go ahead and pull the trigger, it would bring official interest rates down to 0.75% - half of where they sat at the beginning of the year.

At the moment, weaknesses in the economy make a pretty strong case for further monetary easing. Consumer spending has slowed, with high levels of household debt leading to a collective tightening of belts.

And despite the creation of almost 35,000 jobs last month, recent ABS figures showed unemployment rose from 5.2% to 5.3%, inching further away from the RBA’s target of 4.5%. 

Big banks weigh in

After NAB recently brought forward its initial prediction for November, all four major banks agree that an October cut is on the cards.

Chief economist at Westpac, Bill Evans made the call early on, and was vindicated following the release of the RBA’s September meeting minutes.

The minutes hinted quite clearly at an October cut, suggesting that the RBA wasn’t so much admiring its handiwork these past two months as it was planning its next policy move.

CommBank economists revised their predictions on Thursday after the latest round of employment figures came in. ANZ was also swayed by the data, noting that "the slow creep higher in the unemployment rate” will likely force the RBA’s hand.

What’s the government doing to help?

The short answer? Not much.

Lowe has reminded us on several occasions of the limits of monetary policy — that’s why he’s constantly calling on the government to start pulling its weight. But it looks like the government has other things in mind.

“The government has been pretty obviously focused on delivering a surplus, and there are some strong views out there that that’s not the path they should be following right now,” said Marshall.

At a recent meeting of reserve bank elites at Wyoming, Lowe warned that cuts to official interest rates, when not coupled with government efforts to boost spending and investment, would only drive up asset prices.

“To the extent that other policy levers are hard to move, or are stuck, monetary policy is carrying a lot of the weight,” he said. “Monetary policy can't drive long-term growth, but the other policy levers can.”

What would another rate cut mean for mortgages?

Currently, home loan interest rates are at record lows, and plenty of Australians are scrambling to take advantage of current conditions. Another rate cut would throw more gasoline on that fire.

As for how much the banks are likely to pass on to customers, Australians might have reason to be optimistic.

“I don’t think that the banks are going to hold back too much this time. Based on analysis that we’ve done, their net interest margins seem to be holding up reasonably well at the moment,” said Marshall.

“I suspect that we’ll see quite a few lenders pass on most, if not all of the next cut.”

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