Last Wednesday we released a bulletin in which we forecast that the RBA was set to cut the overnight cash rate to 0.1%; the three year target bond rate to 0.1%; the rate on the Term Funding Facility to 0.1%; and the rate the RBA pays on Exchange Settlement balances to 0.01%.
We also forecast that the Bank would commit to further purchases of Australian and semi government bonds in maturities between 5 and 10 years.
We expected that the action would be announced at the next Board meeting on October 6.
We now expect the move will come a month later at the Board meeting on November 3.
Discussion
October 6 happened to be Budget Day so our expectation was that it would be another ‘Team Australia’ initiative with both the fiscal and monetary authorities working together to address the economic crisis.
The dimension of the crisis is best summarised by the official forecasts that the unemployment rate is set to rise to 10% by the end of the year and only be back to around 7% by the end of 2022.
Admittedly, the choice of Budget Day to announce a series of further monetary stimulus steps was without precedent (the Budget is usually on the second Tuesday of the month and the RBA Board meeting is on the first Tuesday of the month).
But the current crisis is without precedent as the blowout in the Budget deficit from $1 billion in 2028/19; to $85 billion in 2019/20; to an expected $230 billion in 2020/21 testifies.
The timing of the key speech from Deputy Governor Debelle, from our perspective, pointed to the October timing.
The speech indicated more concern from the RBA with respect to the outlook and emphasised that the Bank had more scope to ease policy.
It came a week before the ‘black out’ period for the October meeting and was the last scheduled speech before that ‘black out’.
Our reading of the speech was that any policy changes were likely to come very soon.
In fact he noted that it would be better to err on the side of doing too much rather than too little.
As we discussed last week, the arguments for the RBA not changing policy near a Budget due to the need to assess the contents of the Budget did not stand up especially in a crisis period.
For example, it is very unlikely that the RBA will lower its 7% forecast for the unemployment rate by end 2022 as a result of the contents of the Budge
The ‘wait and see” argument also does not pass the ‘history test’.
Since 2000 the RBA has changed the cash rate in May (a week before the Budget) on eight occasions.
May has been the ‘most popular ‘month over the whole year for adjusting policy in those 20 years(ironically, second is November with seven changes).
But certainly cutting the cash rate a week before the Budget announcement has a much less significant effect on the government’s capacity to sell the Budget than acting on Budget Day.
A central bank moving on Budget Day could be interpreted by the government and the bank itself as diverting attention away from the Budget and complicating the government’s task in ‘selling’ the Budget.
The Governor himself, who has been such a strong proponent of fiscal policy, may also see the advantages of allowing space for the government to promote its Budget.
So in the eyes of the authorities, there was probably a tradeoff between a ‘Team Australia’ moment and the government having the clear air to sell its Budget without any distractions from other policy makers.
We saw the package of measures in March (widely described as a Team Australia policy approach) as boosting confidence through the impact of the combined policies. Central banks are influenced by and aim to influence expectations.
For our ‘Team Australia’ theme to have been viable we needed to see expectations and support for the concept build over the course of last week following Dr Debelle’s speech on Tuesday and our note on Wednesday.
That has not happened.
But the arguments for RBA providing a further policy boost to the economy are just as relevant.
Consequently, we expect that the policy initiatives that we have outlined will now be introduced on November 3 giving the government adequate time to sell its Budget without any distractions coming from monetary policy
