Will RBA cut cash rates to 0.1%?

The Reserve Bank of Australia (RBA) might be forced to cut the official cash rates to 0.1% as it feels it needs to provide further support to the economy, according to BetaShares ETFs chief economist, David Bassanese. 

However, further monetary rate cuts would do little to actually provide further stimulus to the economy at this stage but could instead create risks of further asset price distortion– such as housing and shares.  

Bassanese, who expected the official cash rate to be cut as early as next month’s policy meeting, said the RBA would be also likely to cut its 3-year bond yield target from 0.25% to 0.1%. 

“The RBA probably feels it ‘needs to be seen to be doing something’ to support business and consumer confidence at this delicate stage of the economic recovery, particularly given the setback caused by Melbourne’s return to lockdown,” he said. 

“In short, the global central bank currency war – where each is competing to have a cheap currency via very low interest rates – continues, and the RBA likely feels it has no choice but to enter the fray.” 

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According to Bassanese, the RBA was also becoming uncomfortable with the strength in the Australia dollar, particularly as other global central banks – such as the Bank of England and Reserve Bank of New Zealand – toyed with the idea of negative interest rates at time when the US Federal Reserve pledged to keep interest rates at near-zero levels for possibly several more years, and which in turn forced the European Central Bank to canvass possible further monetary stimulus to avoid undue strength in the euro.  

“A rate cut at the October 6 RBA Board meeting would also complement likely further fiscal stimulus to be announced that same day in Federal Budget. It will be a “Team Australia” day of co-ordinated policy stimulus,” he added.