When he was the Reserve Bank’s deputy governor, Philip Lowe once said he didn’t believe that interest rates below 1 per cent were effective in stimulating the economy.
But in a speech to a business group in Armidale, NSW, last week, Governor Lowe gave every indication he is about to do just that – cut the official cash rate to below 1 per cent.
As the market speculates on the probability of the next cut to the official cash rate, Dr Lowe hinted it would be soon, and made it clear that low interest rates were here for the long haul.
“At our board meeting next week [October 1], we will again take stock of the evidence,” Dr Lowe told the gathering.
“It is nevertheless likely that an extended period of low interest rates will be required in Australia to make progress in reducing unemployment and achieving more assured progress towards the inflation target.”
Dr Lowe added: “Almost all major central banks are expected to ease monetary policy over the year ahead, with the United States Federal Reserve and European Central Bank having already moved in this direction.”
So will the governor pull the trigger on Tuesday, or will he wait until November? Or even December?
AMP senior economist Diana Mousina said AMP had been factoring in an October rate cut since August, and Dr Lowe’s speech only cemented that view.
“We think there’s a need to go sooner rather than later to get the economy in a better position, with GDP numbers pretty weak and poor retail spending despite the stimulus [of tax cuts and lower interest rates],” Ms Mousina said.
“And we think they [the RBA] will keep those rates on hold for about two years. It’s just the timing that’s hard to predict.
“So the end game is, we think the official cash rate will go to 0.5 per cent over the next six months – it’s just a question of which months.”
A November cut, she said, is a 50-50 proposition.
The AMP senior economist said his specific comments about central banks making cuts “putting us in a world where we need to follow suit” – combined with last month’s rise in unemployment to 5.3 per cent – made a rate cut on Tuesday almost a certainty.
The market pricing is for another two cuts, possibly three, to come. But that market pricing has always been more dovish, Ms Mousina said.
That sentiment was echoed by UBS head of real estate Tim Church last week. At a finance summit, Mr Church predicted a period of “ultra low” rates.
“We’ve got three cuts from here that will take the cash rate down to 0.25 per cent. That’s as good as ground zero, frankly,” Mr Church said.
Westpac chief economist Bill Evans last week reminded people that “while others had moved around quite a bit” on timing of rate cuts, he and the bank had been tipping the RBA to cut again as early as October since July 24.
“This note is to confirm the RBA forecasts which we released on July 24 that the Bank [RBA] will cut the cash rate by 25 basis points on October 1 and again by 25 basis points on February 4, 2020.
“That call updated our previous call on May 24 when we were the only forecaster [Bloomberg Survey on that day] to argue that the cash rate would fall below 1 per cent,” Mr Evans said in a briefing.
“We were feeling decidedly lonely with our October call.”
Mr Evans said with unemployment having ticked up from 5.2 per cent to 5.3 per cent against the background of the RBA’s stated aim of hitting 4.5 per cent made the October cut highly probability.
“Forward-looking indicators had continued to suggest that employment growth would moderate over the following six months,” the last RBA meeting minutes noted.
The governor’s highlighting of “further weakness in dwelling investment in the near term” and weaker-than-expected GDP growth cemented the bank’s view of an October cut.
Commonwealth Bank senior economist Gareth Aird agreed there were enough signals in the governor’s speech last week to indicate the board will cut again by another 25 points on Tuesday.
Mr Aird said the recent slip in employment numbers, combined with the response of other central banks around the world to global trade ructions, strengthened the bank’s forecast for an October cut.
While CBA agreed with Governor Lowe’s view that a stabilisation of some cities’ housing markets and a bullish outlook for the resources sector would lift economic growth from here, it said more stimulus will be required if the labour market is to grow enough to cause a lift in wages.
But the big question for Australians is, with the margin between deposit rates and lending rates under such pressure, how much room is left for lenders to cut?