The Australian sharemarket has rebounded amid speculation the Reserve Bank will slash interest rates on the same day as the Federal Budget.
The ASX jumped 2.4 per cent during trading on Wednesday – snapping a four-day losing streak that pushed the local index to its lowest level since June.
Analysts said investors were feeling more optimistic about a rapid recovery after the government announced a $4.5 billion upgrade to the NBN and major banks tipped the RBA to cut rates on October 6.
The local market is now 17.3 per cent below its record high on February 20 and 30.3 per cent above its COVID bottom on March 23.
Budget Day rate cut
Wednesday’s sharemarket bounce coincided with speculation that the Reserve Bank will take the official cash rate to just 0.1 per cent on the day of the Federal Budget.
Westpac chief economist Bill Evans described comments made by Reserve Bank deputy governor Guy Debelle on Tuesday as “a fairly clear hint that the Board is set to cut the cash rate” on October 6.
And economists at National Australia Bank offered a similar prognosis – tipping the RBA to cut rates and expand its bond-buying programme at either its October or November board meeting.
Although the Reserve Bank normally pulls its punches in the lead up to the Budget, Mr Evans said a conservative approach “is not appropriate for these unique times”.
“The theme is likely to be, as we saw in March, a Team Australia moment where the Reserve Bank is directly supporting a bold Federal Budget,” he said.
“We now expect the RBA to cut the overnight cash rate to 10 basis points; to adopt a 10 basis point three year bond target; and to adjust the rate on any new drawdowns of the Term Funding Facility to 10 basis points.
“All these rates are currently set at 25 basis points, which the Governor has generally described as the effective lower bound for the cash rate.”
Mr Evans said the RBA is also likely to reduce the interest it pays on Exchange Settlement Account balances to 0.01 per cent, which would encourage banks to buy bonds and lend to the private sector.
Throw the ‘kitchen sink’
Rob Holder, asset allocation and portfolio analyst at Crestone Wealth, told The New Daily the deputy governor’s speech had reassured investors that the bank was prepared to do more to help the economy.
And AMP Capital Australian Equities portfolio manager Dermot Ryan said the prospect of major infrastructure spending in the Federal Budget had also lifted the market – with telco company Service Stream jumping 14 per cent on news of a $4.5 billion upgrade to the NBN.
Mr Ryan said after months of stagnant share prices, investors had been looking for a reason to put their foot on the gas pedal.
“We’ve been in a pretty tight range for about 3 or 4 months now, as the market tries to see what the next step ahead is, in terms of this economic path out of this COVID slump globally,” he told The New Daily.
“And so we had a reasonably low starting point [today], so it’s been an easy one to reverse out of.”
A rate cut on October 6 would be the first cut since March 19, when the RBA took the cash rate to a record low 0.25 per cent and announced it would start buying government bonds (a form of quantitative easing).
Market Economics director Stephen Koukoulas said another rate cut was long overdue but not a forgone conclusion.
He told The New Daily it would boost the economy by encouraging businesses to borrow and invest more.
“It’s one of those ones where you’re in this economic circumstance where you throw the kitchen sink at the problem,” he said.
“The rate cuts by themselves are not going to fix the economy, nor is the Term Funding Facility going to fix the economy in isolation, but they’re all part of each little increment of helping.”
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