NAB: RBA to cut the cash rate in October or November

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NAB has adjusted its monetary policy view, forecasting a cut to the cash rate in October or November.

The change comes in the wake of comments from Deputy Reserve Bank (RBA) Governor Guy Debelle, with NAB predicting the cash rate will be cut by 15 basis points to a record low 0.10%. 

Addressing the Australian Industry Group on Tuesday, Dr Debelle said the central bank's support package could be altered to further assist the country out of recession. 

"As the outlook for the Australian economy unfolds, the Board will continue to assess the merits of the range of monetary options to best support the economic recovery." Dr Debelle said.

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NAB economists said this and many other aspects of the speech had caused them to reevaluate their cash rate forecast.

"NAB expects these further easing measures to be announced at either the October or November Board meetings, noting that the October Board meeting is the same day as the Budget, while the November SMP after the November Board could be an avenue to communicate its messaging to a wider audience," they said.

NAB economists said the impact of this cash rate cut would be marginal, as although the official cash rate target currently sits at 0.25%, the RBA's alternative easing measures have pushed the interbank overnight cash rate down to 0.13%.

Dr Debelle said current outlooks for inflation and unemployment fell short of the RBA's expectation, which NAB highlighted as a reason for a potential cut. 

"The RBA’s current forecasts from the August SoMP (Statement on Monetary Policy) for the economy do not see core inflation back within the band over the forecast horizon (only at 1.5%), while the unemployment rate only falls to 7% by the end of the forecast horizon after peaking at 10%.

"The Victorian lockdown also affected the near-term outlook for growth, while the Bank continues to expect a protracted/slow and bumpy recovery." 

Dr Debelle said a lower exchange rate would be beneficial for the economy and NAB said the recent exchange rate appreciation had likely blunted some of the RBA's policy impact, but ruled out any intervention. 

Negative rates still a no go 

NAB said Dr Debelle's speech backed up previous comments from the RBA, that negative rates were out of the question even in the event of a cash rate cut. 

"As for potential easing options, Dr Debelle largely repeated the policy options that Governor Lowe mentioned back in July should further monetary easing be warranted," NAB economists said.

"Lowering the cash rate without going into negative territory (“it is possible to further reduce these interest rates”).

"This would most likely entail cutting the cash rate to 0.10% from 0.25% which would then flow through to the term structure of rates, the 3-year YCC (yield curve control) target and to the TFF (Term Funding Facility)." 

Commenting on the economy, Dr Debelle said the recovery would be uneven, the unemployment rate would rise further from here, and wages and low rents would restrain inflation. 

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