Last night RBA Governor Phil Lowe delivered a speech, ‘Unconventional Monetary Policy: Some Lessons from Overseas', in which he laid out a potential roadmap for the use of unconventional monetary policy tools in Australia.
Governor Lowe made it very clear that the hurdle to implement quantitative easing was high and unlikely to be necessary, but could be considered once the cash rate reached 0.25%, now clearly the effective lower bound. With the cash rate currently sitting at 0.75% that leaves two further rate cuts in the pipeline before QE would be considered. And at that point the decision to embark upon buying government bonds would be taken with far greater consideration than the decision to cut the cash rate. Should the situation arise Lowe stated the purchase of government bonds would be preferred and state government bonds could be included, but that the purchase of private sector assets was unlikely. The purchase of government bonds is preferred as this gets “into all corners of the financial system”.
During the speech, Lowe outlined that implementing a QE package in Australia would only be considered if there were “an accumulation of evidence that, over the medium term, we were unlikely to achieve our objectives” but that he did not “expect us to get there”. However, less than 12 months ago the RBA were guiding that the most likely move for interest rates was up. Of course, the central bank will always guide to the glass half full, being the traditional backstop of confidence. But to date, inflation remains stubbornly low, the labour market has continued to deteriorate, and for the RBA to meet its mandated inflation target and full employment goals (4.5%) further stimulus measures will be needed. This suggests that despite the Governor’s claims to the contrary, that if the status quo continues then the prospect of QE in Australia will become a surety. Although we are well aware that unconventional monetary policy tools are ineffective in combatting the structural challenges that not just Australia, but also other countries throughout the developed world face, it seems inevitable that central bankers are going to do more of the same. In addition, the Australian government’s fixation on returning the budget to surplus and limited appetite for implementing a complementary fiscal stimulus package leaves the RBA doing the heavy lifting with respect to the Australian economy. The warning today from S&P that Australia’s AAA credit rating could come under fire if the government were to deploy more fiscal stimulus plays into the government’s hands on maintaining the surplus fixation.
We think it is inevitable the RBA will have to lower the cash rate further, spare capacity in the labour market will continue to stunt wage inflation and whilst growth remains subdued and inflation and unemployment well off target the case for unconventional monetary policy will remain a point of focus/speculation.
A more detailed discussion of the case for continued easing and ongoing consumption pressure can be found in yesterday’s update - Wage growth MIA, Consumption Pressure Remains.