Speaking on negative interest rates and central bank purchases of government bonds as stimulus that has worked in some international markets, Reserve Bank governor Philip Lowe has said that negative interest rates in Australia are “extraordinarily unlikely” with “no need to… do anything unconventional here.”
In his address at the Australian Business Economists dinner on Tuesday night, Lowe said that quantitative easing could help the nation’s economy, but that it was not on the central bank’s agenda “at this point in time”.
“Our current thinking is that quantitative easing becomes an option to be considered at a cash rate of 0.25 per cent, but not before that,” Lowe said.
Lowe confirmed that purchases of government bonds rather than mortgage-backed securities or other private sector assets would be the next tool in the financial toolkit to be used.
“At a cash rate of 0.25 per cent, the interest rate paid on surplus balances at the Reserve Bank would already be at zero... So from that perspective, we would, at that point, be dealing with zero interest rates.”
A more unconventional monetary policy, quantitative easing is used by a central bank to increase money supply in the economy.
But Lowe added that the current cash rate, which sits at 0.75 per cent, is still above the level at which the central bank would consider buying government securities, confirming that “quantitative easing is not on our agenda”.
Capital Economics economist Ben Udy forecasts that the RBA will launch quantitative easing in 2020.
“The governor stated that he believes the floor for the cash rate is 0.25 per cent. That’s consistent with our forecast of rates being cut to 0.25 per cent by April next year,” Udy said.
Udy says this view is in contrast to other analysts who expect an interest rate floor of 0.5 per cent.
Australia’s economy has been benefiting from low interest rates, tax cuts and the investment in infrastructure combined with the recent housing price upswing and stronger outlook for the resources sector.
As a result, Lowe said that the RBA would maintain interest rates at low levels until it was confident inflation is “sustainably within the 2 to 3 per cent target range.”
“The central scenario for the Australian economy remains for economic growth to pick up from here, to reach around 3 per cent in 2021,” Lowe said.
“This pick-up in growth should see a reduction in the unemployment rate and a lift in inflation. So we are expecting things to be moving in the right direction, although only gradually.”