MNI INSIGHT: RBA Eyes New Effective Lower Bound For Rates

The Reserve Bank of Australia sees the effective lower bound for its benchmark cash rate below the current record low 0.25%, MNI understands, and while zero or negative rates have largely been ruled out, a further small cut, perhaps as early as October, remains possible if the Bank believes the economy needs more stimulus.

The RBA has previously said its lower bound is at 0.25%, but MNI understands that this has been re-evaluated, much in the way the Bank of England trimmed its lower bound from 0.25% before cutting the Bank Rate to 0.1% in March this year.

Other measures, including zero or negative interest rates and foreign exchange intervention remain highly unlikely. Cutting to zero or lower could hit commercial bank profitability just as government fiscal stimulus is relaxed and mortgage holidays end, increasing the likelihood of loan defaults.

TIMING

Much has been made in Australian media that the next RBA Board meeting on Oct. 6 will be held the same day as the Federal Budget, with some commentators claiming that the date is an opportunity for a "Team Australia" event with both monetary and fiscal policy announcements.

But the RBA meeting has long been set for this date and MNI understands there is no special significance in the coincidence. If, and it remains a very big if, policymakers decide to cut rates in October, MNI understands it will be for reasons other than coordination of policy with the government.

OPTIONS

Speaking this week, Deputy Governor Guy Debelle laid out the RBA's policy options, and while his comments on forex intervention attracted attention, the most likely course of action under consideration would be a further small interest rate cut, which could then prompt a re-alignment of the bank's yield control target in its purchases of Australian government bonds.

Depending on the market yield at the time, this could involve buying more bonds and at different maturities.

Any cut in official rates would also be likely to lower the rate at which the RBA lends to commercial banks through its Term Funding Facility, whose current 0.25% rate matches the bank's overnight cash rate.