Next Major Interest Rate Decisions: RBA & BOE

Central banks are expected to remain generally on hold for the summer.

However, with the recent uptick in coronavirus cases around the world, many analysts are starting to speculate that they might look for ways to increase stimulus.

Here are the key points to consider ahead of the BOE and RBA policy decisions this week.

How Bad is it Getting in Australia?

A little more than a week ago, what was until then a “hotspot” of COVID cases in Melbourne turned into a full-blown community spread. This put an end to Australia’s otherwise effective COVID policy and halted plans for reopening.

So far, the outbreak remains confined to the state of Victoria, which reported 98% of new cases on Sunday (and 12 of the remaining 16 were in neighboring New South Wales).

Even if the outbreak is confined to Victoria, the state will likely be under lockdown for an extended period of time. Victoria also accounts for almost a quarter of Australia’s GDP.

So far, no country has managed to bring community spread of the virus under control in less than a month. Presumably, Australia’s Q3 economic results will be significantly affected.

Enough to Push the RBA into Action?

The consensus among economists is unanimous that the RBA won’t cut rates.

The bank has unofficially paused its buying of government bonds. There is some speculation they could announce more bond purchases, which we would expect to weaken the AUD.

The AUD has appreciated over 4% last month, and might soon pose a problem for the RBA. A stronger Aussie means deflation, and raising the real interest rate. This is something the RBA doesn’t want as it’s trying to stimulate the economy.

So, there are increasing predictions that the RBA might soon express concern about the strengthening of their dollar. It’s not likely that Governor Lowe will make an announcement after the meeting tomorrow, but it’s something AUD traders ought to keep an eye out for.

BOE: Keep Calm and Carry On

The universal conclusion among economists is that the BOE will also hold rates steady. The pound has appreciated even more than the AUD, up 5.1% last month.

However, the UK has a much larger financial sector, so higher interest rates are not such a problem from the central bank. Negative rates have basically been excluded as a possibility by the BOE

At the last meeting, the BOE raised the size of its QE program by £100B. Consequently, no further upsizing of the program is expected this time around. But calls are increasing for the BOE to do something.

The Market is King

Money markets are pricing in a rate cut sometime before March. Debt yield has dropped to near record lows, suggesting that a sizable number of holders expect negative rates at some point.

New COVID cases have remained largely flat for months now, but increased coverage in the press might be spooking investors. That, and the rapidly approaching uncertainty of Brexit.

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