Business

Westpac believes Reserve Bank will cut the interest rate to 0.1 per cent on October 6

Westpac believes Reserve Bank will cut the interest rate to 0.1 per cent on October 6

Westpac believes the Reserve Bank is gearing itself for an interest-rate cut on the same day the Federal Government will deliver its budget.

The major bank’s chief economist Bill Evans is predicting the RBA will slash the official interest rate by 15 basis points on October 6 at its next monetary policy meeting.

It is the same day the Morrison Government is expected to deliver the Federal Budget, which will detail further fiscal measures to support the economy during the recession.

Mr Evans’ forecast of a 0.10 per cent cash rate target comes after the central bank’s deputy governor Guy Debelle on Tuesday, said a further rate carving was being considered.

“The RBA is expected to announce all these policy changes on October 6, the day of the announcement of the Federal Budget, as a Team Australia initiative,” he said.

Prior to Dr Debelle’s speech, the RBA remained quiet about another interest cut in the near future.

On Tuesday, Dr Debelle said ongoing lockdowns and border closures were causing a grinding economic recovery rather than the initial snapback first anticipated.

Mr Evans said the RBA was less likely to wait another month to cut rates due to the budget, especially while there is a great deal of uncertainty lingering within the Australian economy.

“The prospect of the RBA ‘sitting back’ to assess the Budget, which has been seen as the norm in previous years, is not appropriate for these unique times,” he said.

“While in previous speeches from RBA officials considerable emphasis has been given to boosting the fiscal stimulus, this speech focused mainly on RBA policy.”

Westpac is expecting the central bank will also adopt a 10 basis point three-year bond target and adjust the rate on any new drawdowns of its term funding facility to 10 basis points.

Both monetary policy mechanisms ensure the financial sector can be pumped with cheaper liquidity, allowing banks to pass on lower lending rates to households and businesses.

The RBA said the country’s road map out of the lockdown has been hampered by the ongoing shutdown in Victoria, which is fuelling a two-pronged recovery for the economy.

“Overall the recovery has not been a rapid bounce but a slow grind,” Dr Debelle said on Tuesday.

“Until households and businesses are confident about future demand and income, they will be reluctant to spend and invest.”