Finance Finance News Weak inflation: Pressure builds on RBA to cut rates one more time

Weak inflation: Pressure builds on RBA to cut rates one more time

interest rates
The Reserve Bank is expected to cut rates to 0.1 per cent on November 3. Photo: TND
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It’s looking increasingly likely that the Reserve Bank will cut interest rates on November 3 after keeping them on hold for the past seven months.

Economists inferred as much from the governor’s speech on October 15, and financial markets put the chance of a Melbourne Cup Day rate cut at 84 per cent.

But if the RBA board is searching for another reason to pull the interest rate trigger it will likely find one on Wednesday.

For that is when the Australian Bureau of Statistics will release the latest consumer price index (CPI).

The CPI measures the rate at which average prices are rising across the economy by tracking a ‘basket’ of goods that account for a high proportion of household expenditure – with an increase in the CPI called inflation and a decrease called deflation.

The Reserve Bank has an agreement with the federal government to target annual inflation of 2 to 3 per cent “over time” – with the RBA explaining in its statement with the treasurer that this “assists businesses and households in making sound investment decisions” by providing greater certainty over the future price of goods and services.

But economists at Commonwealth Bank expect annual inflation on Wednesday to come in at just 0.5 per cent – setting the stage for an RBA rate cut to encourage spending and lift inflation.

Dr Lowe (L) says a rate cut makes more sense now the economy is reopening. Photo: AAP

“The RBA currently expects inflation to remain below target over their forecast horizon which is an uncomfortable place to be for an inflation targeting central bank,” CBA head of Australian economics Gareth Aird said in a note.

“That discomfort looks set to result in more monetary policy easing at the November Board meeting,” he said.

“Jobs are the focus for the RBA at the moment, but the disinflationary pulse that will be evident in the data next week will certainly feed into the policy debate and will be consistent with more easing.”

But given the official cash rate is already at a record low 0.25 per cent, will another cut make much difference to households and businesses?

How a rate cut could affect you

In good news for home owners, AMP Capital chief economist Shane Oliver said he expected banks to pass on the rate cut in full.

“The rate cut will depress variable mortgage rates by around 0.15 per cent (15 basis points), as it will be hard for banks not to pass it on in full given the cheap funding they are getting from the RBA,” Dr Oliver said in a note, referring to the RBA’s Term Funding Facility.

“And the additional bond buying will further depress rates on fixed rate mortgages.” research director Sally Tindall said “a mortgage rate cut of 0.15 per cent would save the average homeowner $33 a month“.

So not much. But Canstar financial services executive Steve Mickenbecker believes they would be lucky to even get that.

Although he agreed the Term Funding Facility (TFF) had given the banks more room to pass on rate cuts to home owners, he said the TFF was a short-term measure and banks over the long term would still have to rely on bank deposits to fund their home loans.

Which means the banks would have to cut savings rates to cover the cost of cutting mortgage rates – and savings rates can barely go any lower.

As a result, Mr Mickenbecker said a rate cut would have limited impact.

And Blueprint Institute chief economist Dr Steven Hamilton agreed.

“It’s welcome – any additional support is welcome – but it’s very modest,” he said.

It just raises the pressure for more fiscal stimulus.”

Dr Hamilton said the federal budget lacked immediate stimulus and effectively amounted to a reduction in support over the next three months given the cuts to JobKeeper and JobSeeker.

And so, he said, the government had to do more.