BILL’S BITES: Where rates will bottom out

The employment report for September printed a modest fall in the unemployment rate to 5.2 per cent. Further, the underemployment rate fell from 8.53 per cent to 8.35 per cent. 

That will be sufficient to avert another rate cut from the RBA in November, which Westpac has consistently argued was unlikely.

However, the October RBA meeting minutes made an important point around the effectiveness of policy stimulus that had not been part of earlier commentaries which was highly relevant for any discussion around the Effective Lower Bound (ELB) for the cash rate in this cycle. 

Westpac’s current forecast (first set out on July 24) is that the ELB is 0.5 per cent and will be reached at the February Board meeting.

We expect that the confidence effects of negative or zero rates are likely to be profound while transmission would be affected by banks’ unwillingness to set negative retail deposit rates. If, as we expect, the move to the ELB will not provide the RBA with sufficient evidence that the economy is on the path to full employment and attaining its inflation target, it may have to consider other policies.

In recent speeches, the Governor has signalled that any move to unconventional policies would likely take the form of asset purchases. We are somewhat surprised given the success of the bank loan program adopted by the Bank of England in 2016. However, for now, it makes sense to focus on asset purchase alternatives. 

Asset purchase programs explicitly aimed at monetary accommodation were announced by central banks globally with about 18 programs launched between 2009 and 2016. Six central banks purchased mostly public sector issued securities, although in some cases, programs also encompassed corporate and covered bonds, commercial paper, agency MBS and other asset backed securities, real estate investment trusts, and exchange traded funds (equities). 

The RBA will be studying these programs and, given that they are very close to the ELB, is likely to be prepared to adopt some form of asset purchase program, if needed, over the course of 2020.

_{This material contains general commentary, and market colour. This material does not constitute investment advice. This information has been prepared without taking account of your objectives, financial situation or needs. We recommend that you seek your own independent legal or financial advice before proceeding with any investment decision. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts. Except where contrary to law, Westpac and its related entities intend by this notice to exclude liability for this information.}