MNI PREVIEW: ​RBA Hold Likely, But Outside Chance Of Small Cut

The Reserve Bank of Australia meets Tuesday, with some expectations the increasingly dovish central bank could cut official interest rates from the current record low of 0.25% and announce a program to purchase additional government bonds to meet a lowered yield target for the 3-year government bond. However, the meeting clashes with the Federal Budget, due later the same day, prompting some to suggest the RBA could delay any decision over further monetary easing until its November meeting.

The bank's recent signals, expressed by Deputy Governor Guy Debelle late last month, suggest more rate cuts are being considered, although zero or negative rates have been largely ruled out and the policymaker offered no timeline on RBA thinking.

Some pundits have claimed the RBA is looking at cutting rates to as low as 0.01%, but MNI's understanding is that while the RBA has lowered its view on the effective lower bound for the cash rate from 0.25%, a smaller cut, when it comes, is more likely.

BOND-BUYING

If the RBA cuts rates in October, the move would likely be matched by a new yield target on the benchmark 3-year government bond, which, at 0.25%, has mirrored the RBA's official cash target.

The central bank has spent just over AUD60 billion since March to control bond yields and a new lower target would likely require additional purchases.

A lower cash rate could also see an adjustment in the rate payable on the RBA's Term Funding Facility, which offers cheap funding to banks to lend to business

KEATING'S CALL

While the RBA has become increasingly dovish over the last two months, it continues to rule out the direct purchase of government bonds, despite the urging of former Prime Minister Paul Keating.

Keating last week slammed the RBA's current conservative approach, calling for direct bond buying to help with Australia's recovery, especially youth unemployment. But MNI understands that the RBA believes any such move goes against the institutional separation between monetary and fiscal policies, which has underpinned the role of the bank for decades.

According to the former PM, the RBA should be "funding a level of government outlays by buying appropriate levels of government debt and locking it away on its balance sheet, thereby making the government's funding task much easier and support for the country better."

The RBA view on monetary financing, last publicly articulated by Governor Philip Lowe in August, is that direct bond buying is only a temporary solution to budgetary restraint for governments and creates debt issues which must be paid for in future through higher taxes, higher inflation or lower government spending.

The bank also points to what it describes as strong investor appetite for Australian government debt, despite historically low interest rates, as evidence that direct purchases by the central bank are not currently necessary.