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Can RBA Keep Promise to Hold Rates Steady?

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Through most of the summer, it appeared that the RBA had hit the bottom of their cutting cycle. And it was just a matter of how long the reference rate would stay at 0.25%.

The lockdown in the state of Victoria, however, has changed the analysis. This led to an increasing number of analysts suspecting more action on the monetary policy front.

The RBA estimates that the COVID outbreak in Melbourne had around a 2% negative impact on GDP this year.

Forecasts were for GDP to drop 6% this year, before returning to growth at 4% next year. This was according to the Reserve Bank projections.

Expectations are for the federal government to unveil a massive increase in spending. In addition, some analysts project the RBA to join in a two-pronged initiative to boost the economy.

What Could Move the Market

The consensus among surveyed economists is that the RBA will hold rates unchanged, by a 8:2 margin.

Governor Lowe has been adamant that negative rates are a possibility, but very, very unlikely. It’s generally understood that the RBA will hint at cutting rates to 0 or below before actually effectuating the policy.

A way to split the difference would be a 15 basis point cut to 0.1%. This would be a somewhat unorthodox move, but not unprecedented among banks.

Should the RBA decide to do this, it would come as a surprise to the markets and could weaken the AUD. Only 15% of analysts are betting on this happening.

Where there is more consensus is for a rate cut later in the year, with nearly 50:50 odds that the RBA will cut rates to 0.1% or lower in the next three months.

If Lowe uses this meeting as an opportunity to signal that a rate cut is imminent, it could also weigh on the AUD.

However, given the relative expectation that more relief will be necessary to help the Australian economy, the market likely has priced in some degree of easing.

Other Options

While the consensus is that the RBA will basically stay pat, there are potential tweaks in their current policy that they might announce.

One of them was recently discussed by Deputy Governor Debelle, which is to buy bonds further along the curve. The impact of this would also weaken the AUD.

Buying out in the curve means that the RBA would buy back bonds with longer maturities, keeping the interest rate curve lower. Essentially, it’s a form of expanding the yield curve control policy already in place.

The Banker Commentary

Even while discussing the possibility of longer yield curve control, Debelle stressed that it was not imminent.

All of the policy committee members who have spoken have stressed that they don’t see the use of negative rates.

With the government about to publish their 2021 budget, most analysts are suggesting the RBA will take a wait-and-see attitude until the next meeting when they will have all the data from Q3 to assess.

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