RBA weighs rate cut hours before budget

Economists are split on whether Reserve Bank officials will cut the cash rate from 0.25 per cent on Tuesday, hours before the federal budget is released.

The RBA’s monthly decision will come before what is tipped to be a big-spending federal budget aimed at helping the economy out of the coronavirus recession.

AMP Capital chief economist Shane Oliver said his base case was the bank would cut the cash rate, its term funding facility rate and three-year bond yield target to 0.1 per cent.

This would provide a united “Team Australia” front on the same day as the budget, Mr Oliver said.

“This is what we think they should do. Why wait,” Mr Oliver said in a note.

The economy remains ravaged by virus restrictions, with the temporary closure of businesses and social distancing measures meaning fewer jobs and less spending.

The unemployment rate is 7.5 per cent and expected to rise, while deflation of 1.9 per cent for the June quarter was the largest quarterly fall in the 72-year history of Australia’s Consumer Price Index.

Westpac chief economist Bill Evans believed a cash rate cut would come, but no longer expected it on Tuesday.

He has revised his estimate to a November 3 rate cut to 0.1 per cent. This would allow the federal government to better communicate its budget.

RBA deputy governor Guy Debelle last month named a rate cut among four policy options the bank had to boost the economy.

He said it was possible to lower interest rates further without going negative.

The other options included extending the bank’s bond buying program to longer maturing issues, foreign exchange intervention and negative interest rates.

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