Today's RBA Board meeting takes place just hours before Treasurer Josh Frydenberg hands down the Federal Budget for 2020-21. The consensus call in the market is that the decision statement from Governor Lowe (due 2:30pm AEDT) will confirm an unchanged stance in policy settings from the Board, though the option of further easing remains firmly on the table.
A recent speech from Deputy Governor Guy Debelle noted; "Given the outlook for inflation and employment is not consistent with the Bank's objectives over the period ahead, the Board continues to assess other policy options". The most likely of the options under consideration appears to be a reduction in the Bank's rates structure, including the targets for the cash rate and 3-year AGS yield and Term Funding Facility (TFF), which are all currently at 0.25%. Under existing arrangements, banks' surplus exchange settlement (ES) balances held at the RBA earn 0.1%, so there is room to cut rates further by up to 15 basis points. Such a move would then likely involve a lowering of the rate applied to ES balances. Other options are being considered, including additional bond-buying at the long-end of the curve, foreign exchange intervention and negative rates, though each for their own reasons they shape as unlikely at this stage as discussed by recently by both Dr Lowe and Dr Debelle.
As the situation currently stands, the effective cash rate is sitting a little above 0.1%, yields on 3-year Commonwealth bonds trade slightly below the 0.25% target and almost all of the $84bn in initial allowances under the TFF was taken up by the banks ahead of the 30 September deadline, while an expansion to the program was announced at the previous Board meeting. The recent decline in the level of the Australian dollar over the inter-meeting period (around -3% in USD and trade-weighted terms) is sure to have come as a welcome development for the Board. With the RBA clearly of the view that fiscal policy is more likely to be effective than further monetary easing, it is likely the Board will wait for the Federal Budget to be handed down first and assess the implications for its outlook thereafter.
