Opinion: RBA Oct Cash Rate Cut Seems Like a Done Deal But is 0.5% Rate by Year-end Now a Possibility?

By Sophia Rodrigues

The Reserve Bank of Australia is very likely to lower the cash rate at its next board meeting in October. I would go further to say it is a done deal.

The key question now is whether we will see cash rate at 0.5% by the year-end, which means 25bps cut each in October and November.

I think there is a good chance it might happen. That would leave RBA mulling whether to do quantitative easing early next year, or do another cut to 0.25% next year and start QE simultaneously.

After the 25bps cut to 1.0% in July, it was always known that every RBA meeting from there would be live. I thought September was a good possibility, and October was stronger, so it took me by surprise when I noticed market has started paring back pricing for October.

There are several solid arguments for rate cut and we all (at least majority of us) agree the cash rate needs to be lower than the current 1.0%. The only issue is the timing.

In my mind, the case for October cut was sealed when the European Central Bank cut interest rates further into negative territory on September 12.

The latest labor force data published by the Australia Bureau of Statistics on September 19 has left no doubt the cut has to happen sooner, and the RBA is likely to effect 25bps cut to 0.75% as soon as October 1.


From what I have read so far, the main argument against a cut has been a rebound in housing prices. Indeed there are still many who think the RBA will not push the cash rate lower because it will fuel “house price bubble.”

But I believe the current developments in the housing market is unlikely to prevent the RBA from cutting the cash rate further because it has so far not expressed any concern.

Governor Philip Lowe’s comments at the Parliamentary testimony in August are very pertinent in this regard.

Lowe acknowleged that low interest rates do have a significant impact on housing prices and the recent lowering of interest rates had pushed up house prices a bit.

But he also added that, “In the current environment, I'm not particularly worried that the lower interest rates will cause people to race to the bank and borrow more and increase their leverage.”

This is because people had already borowed a lot and the same borrowing psychology no longer exists, and one of the reasons is their income growth isn't what it used to be.

The other reason he cited was that the supply of credit is still pretty restricted.

“At the moment, I'm not worried that we'll see a borrowing binge because of lower interest rates but we do need to keep an eye on that.”

While Lowe didn’t express much worry from the demand side, he did suggest that the supply side of housing could push up prices if it doesn’t catch up with strong population growth.

“New development is slowing down, and one of the issues we're going to keep a very close eye on over the next little while is what the supply of housing is doing. If developers cannot get finance, the supply of housing will slow a lot and we will be sowing the seeds for the next upswing.”

It is not unreasonable to expect that lower interest rates and the rise in housing prices so far could provide a boost to dwelling investment, and that would be good not just for economic growth and household consumption but will also help keep a lid on housing prices.

The RBA’s view doesn’t appear to have changed much since August even though housing prices rose during that period.

In the minutes of the September board meeting, the RBA described the rise in prices in established housing markets in Sydney and Melbourne as a “turnaround.” That’s hardly a a statement of concern.

What the RBA would like to see is growth in housing turnover, and in dwelling investment because that would boost spending on home furnishings and other housing-related items, It would thus contribute to household consumption growth which is a key area of uncertainty.

--Email: sophia@centralbankintel.com