Westpac's Outlook For BBSW

Westpac note that "it is well known that there is now a large excess pool of cash in the system and we would expect that will only grow in coming months, especially if the RBA undertakes a larger amount of bond purchases. So it is no surprise that the effective actual cash rate has fallen below the cash target, to 0.13%. From a BBSW perspective, there are two implications. The first is that the RBA has effectively funded the banks at cheap levels, meaning there is less need to issue prime paper and, the second is, by underwriting bank short-end funding, the RBA have effectively reduced the "credit" component of BBSW to 0bps. Investors are therefore exhibiting indifference between buying Treasury Notes or Bank Bills. The big question, then, is just how low BBSW can go? It is already below the effective cash rate, supported on the demand side by non-bank investors having excess cash in their portfolios given the current uncertainties. At its current level, it would still be below the new cash rate target but above the effective cash rate. If it were to maintain the same spread to the effective cash rate as it currently exhibits, then it is possible that a rate in the vicinity of 0.00%-0.02% could be achieved. We are still not convinced that a negative BBSW would be sustainable and put a non-zero but low probability on that outcome."