It’s that time again. On Tuesday the Reserve Bank of Australia will be meeting to discuss the cash rate.
According to the latest cash rate futures, the market is reasonably undecided and is pricing in a 56% probability of a rate cut to zero.
The bank stated: “The RBA is expected to keep policy settings unchanged at its September meeting. The Bank is providing support to the economy through a range of stimulus policies and will continue to do so for the foreseeable future.”
“The key elements have been: 1) lowering the cash rate to 0.25%; 2) targeting the 3 year government bond rate at 0.25%; 3) market operations, as needed, to provide ample liquidity to the banking system; 4) a Term Funding Facility for the banking system providing 3 year funding at 0.25%; and 5) Setting the rate paid on Exchange Settlement balances at the RBA at 10bps,” it added.
However, Westpac doesn’t appear overly convinced that this is enough and suspects the central bank may be forced to do more in the future.
It explained: “Persistently poor economic outcomes – growth well below trend, high unemployment, and inflation below the bank’s 2–3% target – mean the RBA will need to maintain these policies for an extended period and may come under pressure to do more in the future. For now though the bank is of the view that monetary policy is doing “what it can”.”
When will rates go higher?
Unfortunately for savers and income investors, don’t hold your breath for a rate increase any time soon. In fact, it could be years before we see a hike, according to Westpac.
It notes that “the [Reserve] Bank is prepared to purchase three year bonds at 0.25%, indicating that the cash rate is expected to stay at 0.25% at least out to August 2023.”
In light of this, I would sooner be putting my money into Westpac shares rather than its bank accounts, or buying dividend stars such as Dicker Data Ltd (ASX: DDR) and Rural Funds Group (ASX: RFF) ahead of term deposits.
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Motley Fool contributor James Mickleboro owns shares of Westpac Banking. The Motley Fool Australia owns shares of and has recommended Dicker Data Limited and RURALFUNDS STAPLED. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.