Economic punters betting on a Melbourne Cup rate cut

An interest rate cut on Melbourne Cup day is looking increasing likely after the Reserve Bank of Australia (RBA) hinted at the possibility in a recent speech.

Speaking at a conference in Sydney earlier this month, RBA Governor Philip Lowe said that while the board had yet to make a decision on moving rates, an interest rate cut would have a better economic impact now than it would have had earlier on in the pandemic.

“When the pandemic was at its worst and there were severe restrictions on activity we judged that there was little to be gained from further monetary easing,” Mr Lowe said.

“The solutions to the problems the country faced lay elsewhere. As the economy opens up, though, it is reasonable to expect that further monetary easing would get more traction than was the case earlier.”

The official cash rate is currently sitting at 0.25 per cent after the RBA made the extraordinary move to cut rates twice in March 2020, in the wake of COVID-19.

March’s interest rate cuts were made to provide a short-term economic bridge for the country, but the long-term impacts of further monetary easing need to be considered too.

Mr Lowe noted that while monetary easing does help people get jobs, improve balance sheets and reduce problem loans, it has its setbacks too.

“This benefit needs to be weighed against any additional risks as people take more investment risk in the search for yield,” he said.

“We also need to take into account the effect of low interest rates on people who rely on interest income.”

Nevertheless many economists are tipping a new record low rate will be announced after the RBA’s November meeting, with predictions there will be a 15 basis points cut that will bring the official rate to 0.10 per cent.

Low rates will stick around for years

The RBA might not be able to reveal exactly when the next rate cut will be, but they have at least been upfront about when they expect the next rate rise to be.

As Mr Lowe pointed out, the Reserve Bank has made it clear that they will “‘not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band”.

They don’t expect this to happen for at least 3 years.

While interest rate hikes might seem like a long way off, Mr Lowe said that they can affect people’s decisions and asset pricing, so the bank wanted to be transparent.

The board will be meeting next on Tuesday 3 November so keep an eye out for a possible rate cut, and if there is one then find out if your lender will be dropping their rate too.

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