The Reserve Bank of Australia has said further cuts to the interest rate are a possibility, albeit a slim one, in an economy update on Tuesday.
Also read: Will interest rates go up in a recession?
Australia’s official cash rate fell to its historic low of 0.25 per cent in March, with the RBA having previously been reluctant to voice any sort of consideration for taking interest rates even lower.
However, speaking on the Australian economy and monetary policy to the Australian Industry Group, RBA deputy governor Guy Debelle said more cuts aren’t completely out of the question.
“Given the outlook for inflation and employment is not consistent with the Bank's objectives over the period ahead, the Board continues to assess other policy options,” Debelle said.
Among those options are to purchase more bonds with maturities greater than three years, or to intervene with foreign exchange rates, with Debelle noting a lower exchange rate would help the economy.
The next two options were to move interest rates lower without going negative, or to enter negative rates.
“The empirical evidence on negative rates is mixed,” Debelle said.
“In the short-term, they can contribute to a lower exchange rate. In the medium term, the effectiveness can wane including through the effect on the financial system.”
Additionally, taking rates negative can incentivise spending as consumers seek to preserve the value of their savings, a challenge given Australians’ saving rate is already at a historic high as shattered consumer confidence and fewer opportunities to spend on discretionary items combine to create a potent economic headache.
While the RBA has previously said it’s unlikely it will cut rates further, Debelle flagged challenges in the nation’s economic recovery, describing it as a “slow grind”.
“Until households and businesses are confident about future demand and income, they will be reluctant to spend and invest.”
However, he also said the Government has been correct to spend as much as it has on the JobKeeper and JobSeeker income supports, and that the government can afford to spend more.
“Absent the stimulus, the decline in GDP and employment would have been significantly larger and there would have been much greater financial hardship,” Debelle said.
“That households saved a large amount of this income support means that their balance sheets are in a considerably better place than would normally be the case in a recession. They are better placed to support the recovery as it unfolds.
“The transfer from the strong balance sheet of the government to bolster the balance sheet of the household sector is an entirely appropriate and timely policy response.”
Federal Treasurer Josh Frydenberg will announce the federal budget on Tuesday 6 October.
Budget day RBA cut: Westpac’s prediction
Responding to the RBA’s words, Westpac chief economist Bill Evans predicted a budget day rate cut.
“This will be a Team Australia event preceding the Federal Budget announcement later that day,” Evans said.
He said the cut will coincide with Treasurer Josh Frydenberg’s 2020 budget to highlight its support of a “bold budget”.
The October cut will take the official cash rate to 0.10 per cent.
“The prospect of the RBA “sitting back” to assess the Budget, which has been seen as the “norm” in previous years is not appropriate for these unique times.”
NAB also predicts an imminent rate cut, with it setting its sight on an October or November move.
However Evans said there isn’t any significant reason to wait.
"It is the medium term projection that the unemployment rate is still likely to be around 7 per cent by the end of 2022 – the Deputy Governor refers to a 'slow grind' – and that the shortfall in demand will be 'a significant break on the recovery'," he said.
"That outlook is unlikely to change in the November forecast revisions, hence no real case can be made to 'wait'."
Make your money work with Yahoo Finance’s daily newsletter. Sign up here and stay on top of the latest money, news and tech news.
Follow Yahoo Finance Australia on Facebook, Twitter, Instagram and LinkedIn.