National Australia Bank sees 'significant risk' of monetary easing next month

Marco Green
September 24, 2020

Australian shares climbed on Wednesday by their most in more than two months as expectations grew that the central bank would cut interest rates in two weeks.

Westpac economist Bill Evans said he expects the Reserve Bank of Australia (RBA) to further cut rates from a record low of 0.25%, sending the Australian dollar and three-year bond yields lower.

Yields on the 10-year paper were down to 0.86% from 0.9%.

Evans, who has a reputation for accurately predicting RBA policy shifts, joins other strategists who see a coordinated fiscal and monetary effort next month when the government is expected to announce new stimulus spending.

The central bank has four policy options if the economy needs a further boost, deputy governor Guy Debelle says, indicating it's possible to lower interest rates further without going negative.

The RBA had slashed interest rates to a record low 0.25% in an emergency meeting in mid-March to backstop the economy against the coronavirus crisis. "This is significant for ACGBs, and we have been highlighting how short-dated yields have room to drop lower on the basis that such a move would likely include a cut to the three-year bond yield target".

The RBA is now targeting three-year yield at 0.25 per cent. Local newspapers have said the government could inject large amounts of money into the economy and provide extra infrastructure spending funds.

Economists also expect further fiscal policy measures to be announced in a long-awaited federal budget, due on October 6. "That's why we're seeing consumer stocks and the financials underpin today's rally".

"As the outlook for the Australian economy unfolds, the board will continue to assess the merits of the range of monetary options to best support the economic recovery", he told the Australian Industry Group on Tuesday.

"Negative rates can also encourage more savings as households look to preserve the value of their saving, particularly in an environment where they are already inclined to save rather than spend", he said.

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