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In its weekly outlook, Westpac’s Bill Evens highlights the probabilities of ultra-low interest rates and the beginning of asset purchase (popularly known as Quantitative Easing-QE) as the Reserve Bank of Australia.

Key quotes

“The employment report for September printed a modest fall in the unemployment rate from 5.26% to 5.20%. Further, the underemployment rate fell from 8.53% to 8.35%. That will be sufficient to avert another rate cut from the RBA in November.”

“Westpac’s current forecast (first set out on July 24) is that the ELB is 0.5% and will be reached at the February Board meeting.”

“That decision will be determined by the RBA’s assessment of the likely effectiveness of moving to 0.25% on household cash flows and the currency, contrasted with any concerns around unintended consequences, particularly associated with the stability of the financial system; the impact on confidence; and whether such a move might have negative implications for inflationary expectations.”

“However this process is different to the normal process for forecasting the end point of any policy cycle. That forecast typically hinges around forecasting how far below (or above) neutral (or R*) the cash rate will need to be pushed before the authorities can be comfortable of achieving the objectives of full employment and inflation sustainably in the 2-3% target range.”

“So the policy around choosing the ELB will likely be determined by the trade-off between the expected impact of further cuts and unanticipated consequences of ultra-low interest rates.”

“We also assess that the announcement from the banks that the standard variable home loan rate was “only” being reduced by 13-15 basis points would, following highly critical media coverage, have also undermined confidence.”

“Combined with the impact on confidence of low rates and partial pass through it is reasonable to expect that the RBA will see the ELB as a positive level consistent with the 0.5% which we currently envisage.”

“The RBA will be studying these programs and, given that they are very close to the ELB, is likely to be prepared to adopt some form of asset purchase program, if needed, over the course of 2020.”