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Summary
- The Reserve Bank is set to unveil the much-awaited monetary policy measures.
- It is expected that the interest rate would be lowered to 0.1%.
- The market is expecting that the Reserve Bank will likely expand its bond-buying program.
The Reserve Bank of Australia (RBA) is set to announce monetary policy decision later today. The top brass at the bank have been continuously quashing the idea of potential negative interest rates in Australia. Currently, the cash rate sits at 0.25%, which is expected to be lowered at this meet.
Over the past six months, the Australian economy stepped into a recession for the first time in around 30 years. It has forced the Government to unveil some of the largest stimulus packages and spending programs.
The Reserve Bank has also played its part by cutting policy interest rates, announcing funding facilities, and yield targeting. The motive of the central bank has been to keep the borrowing costs lower in the economy.
Six months ago, the fate of the housing prices looked pretty dire and the market was expecting the housing prices to crash significantly. However, the housing prices have not touched those predictions by far and are on an upward trajectory in most cities for the past few months.
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The market expectations for an interest rate cut are also high this time around, and the general consensus is that the cash rate would be 0.1%. Likewise, the Reserve Bank is expected to have a new yield target of 0.1% for the three-year Government bond.
The general expectation is that the central bank would unveil a major bond-buying program to keep the borrowing costs lower for businesses and households. The policy interest rates are also expected to hit a new low.
The unemployment rate now sits at an uncomfortable level for the policymakers, and this is despite the Government’s ongoing JobKeeper program. Industries like hotels, tourism and airlines continue to feel the pain.
With an expected interest rate cut, the Australian households would be benefitted with lower mortgage payments when the interest rate cuts would be passed by the banks. Even though a small amount, households would be able to save something.
On Monday, the Australian Bureau of Statistics (ABS) released dwelling numbers, which showed a 15.4% increase in dwelling approvals in seasonally adjusted terms. Similarly, new home loan commitments for housing increased by 5.9% in September.
The governor had earlier noted that Australia’s 10-year yields were relatively higher than that of developed nations. This is perhaps inducing foreign capital flows to Australian Governments bonds – a reason for stronger AUD.
If the Reserve Bank starts its bond-buying program, it would be directed to keep the yields lower. But the bank would also need to purchase longer-dated bonds like 10-year ones. As of now, the bank has been buying 3-year bonds since it is targeting the 3-year yield.
