Commonwealth Bank of Australia expects steady policy rates in October

SYDNEY (Reuters) – Economists at the Commonwealth Bank of Australia (CBA) expect the country’s central bank to hold interest rates at a record low 0.25% at its Oct. 6 board meeting, in contrast to calls for a cut from its two major rivals.

Financial markets are pricing in a 60% chance of a cash rate cut by the Reserve Bank of Australia (RBA) to 0.1% from 0.25% now. Yields on three-year government bonds have dropped to 0.2%, implying a 33% chance that yield curve target is also lowered to 0.10% from 0.25%.

“So the meeting is clearly ‘live’,” wrote Gareth Aird, CBA’s head of Australian economics, adding the RBA will leave policy rates unchanged next month.

“We believe the RBA will be acutely aware that the potential costs and risks of (easing) at this juncture outweigh the potential benefits.”

Aird said tinkering with the cash rate carries the risk of other important short-term rates falling into negative territory, which would be a clear deterrent for the RBA from here.

Earlier this week, Westpac Banking Corp Economist Bill Evans revised his RBA rate call to predict a 15 basis point cut while National Australia Bank has said an easing is likely next month or in November.

The change in stance followed a speech by RBA Deputy Governor Guy Debelle on Tuesday where he left the door ajar for further monetary easing.

CBA’s Aird said at this stage an increase in the rate of government bond purchases was the most likely next step from the RBA on the monetary policy front.

“We believe the RBA will not introduce new policy options until the current actions have been expanded. That leads us to conclude that monetary policy is on hold in October,” he noted.

(Reporting by Swati Pandey; Editing by Christian Schmollinger)