This afternoon the Reserve Bank of Australia is scheduled to hold its March Board meeting and make its Official Cash Rate announcement.
This will be its second meeting of the year. The first meeting in February saw the central bank keep rates on hold.
Will the RBA cut rates in March?
A rate cut to zero is certainly in play judging by the ASX 30 Day Interbank Cash Rate Futures.
On Monday, the March 2021 contract was trading at 99.965, which indicates a 69% probability of an interest rate decrease to zero at today's meeting.
However, not everyone believes a cut is in play at today's meeting.
According to the latest weekly economic report out of Westpac Banking Corp (ASX: WBC), its economics team are ruling out any action today.
What did Westpac say?
Westpac's Chief Economist commented: "While we have seen extraordinary developments in bond markets over the last week, I do not think they will impact the Bank's key messages. We expect there will be no change in the policy settings and that the conclusion from the February Statement by the Governor will be confirmed."
The statement that Mr Evans is alluding to is as follows:
"The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. The Board does not expect these conditions to be met until 2024 at the earliest."
What is the bank expecting in the future?
In the economic note, Bill Evans concluded:
"The sharp increase in bond rates is reflecting an improving growth outlook rather than any expectation of an overshoot in inflation. Central banks are committed to patience and do not see significant risks of overshoot – the traditional pre-emptive approach to policy has been scaled back.
Markets are convinced that the RBA cannot extend its three year guidance on a stable cash rate beyond the middle of 2021.
Justifying that market expectation will require a significant lift in inflation and wages growth forecasts.
At present Westpac does not expect to see conditions sufficiently buoyant to support the necessary lift in the official forecasts. QE has been accepted by the Bank as a success; a more flexible approach to QE on an ongoing basis might be adopted when the current program expires in October."
In light of this, Westpac continues to forecast the cash rate remaining on hold at 0.1% for as far out as its forecasts go – December 2022. But it could be even longer than that.
