Melbourne Cup rate cut a firm favourite

A November rate cut by the Reserve Bank of Australia now looks all but certain, according to Commonwealth Bank Chief Economist Stephen Halmarick.

Mr Halmarick said the Reserve Bank of Australia (RBA) will likely push further into what he labels “conventional unconventional monetary policy space” at the Board meeting next Tuesday.

In a recent speech, the RBA Governor, Philip Lowe, made it clear that while the economic recovery was now underway, further monetary policy easing is coming.

“This easing is expected to involve a cut in the three key interest rates – the cash rate target, the 3 year bond yield target, and the Term Funding Facility target from 0.25 per cent to 0.1 per cent,” Stephen Halmarick said.

“Critically, this easing of monetary policy is expected to be implemented at the same time as the RBA looks set to revise upwards their economic forecasts given the run of better economic data.”

Mr Halmarick said monetary policy has a significant role to play in supporting the Australian economy by continuing to ensure very low borrowing costs, both for Commonwealth and State, are maintained for an extended period of time.

In delivering the Federal Budget earlier this month, the Government announced a significant level of fiscal policy support to the economy. This support, understandably, comes at the cost of increased debt.

“The support being provided by fiscal policy to the Australian economy is a vital part of the path to recovery,” Mr Halmarick said.

“This support has been enhanced in the Budget through a combination of income support programs, health related spending, income tax cuts, employment support programs, infrastructure spending and a focus on regional spending.

“Whilst the level of government debt will continue to rise in the years ahead, now estimated to reach $A966.2 billion by June 2024, representing a peak of 43.8 per cent of Gross Domestic Product (GDP), the economic return on this debt will far exceed the interest costs.”

Mr Halmarick said the level of fiscal policy support will inevitably give the country’s economic recovery a much needed boost. In 2020/21, the Australian economy is now only expected to contract by 1.6 per cent, while economic growth could rebound by as much as 3.5 per cent in the following year.

“Bottom‑line is that Australia should continue to outperform most other major OECD (Organisation for Economic Co-operation and Development) economies in recovering from the COVID‑19 recession,” he said.

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