There is increasing discussion in Australia regarding the effectiveness of conventional (both fiscal and monetary) and unconventional monetary policy tools to stimulate economic growth. Unconventional monetary policy tools have been used by several major central banks after interest rates have been reduced to zero or near zero levels. Many economists believe the RBA may be forced into unconventional measures because the impact of recent interest rate cuts in driving down the unemployment rate and lifting wages growth appears to be insufficient to meet stated policy goals.
Last month, RBA Governor Dr Lowe delivered a speech titled “Unconventional monetary policy: some lessons from overseas” where he outlined possible approaches for the use of unconventional monetary policy tools in Australia. Dr Lowe commented “if markets were to become dysfunctional, you can be reassured by the fact that we [the RBA] have both the capacity and willingness to respond”. Dr Lowe confirmed the RBA will not use negative interest rates in Australia to stimulate the economy as “we are not in the same situation that has been faced in Europe and Japan. Our growth prospects are stronger, our banking system is in much better shape, our demographic profile is better and we have not had a period of deflation. So we are in a much stronger position”. Dr Lowe stated that it would only be at the point the cash rate reached the “effective lower bound of 0.25%” that “QE would be considered if there was an accumulation of evidence that, over the medium term, we were unlikely to achieve our objectives. In particular, if we were moving away from, rather than towards, our goals for both full employment and inflation”. Dr Lowe guided that “At the moment, though, we are expecting progress towards our goals over the next couple of years and the cash rate is still above the level at which we would consider buying government securities. So QE is not on our agenda at this point in time…There may come a point where QE could help promote our collective welfare, but we are not at that point and I don’t expect us to get there.”
Amicus notes when QE was enacted by the European Central Bank for the Eurozone, the largest reduction in bond yields occurred between the date of the announcement and the start of the program, thus the signalling effect was greater than the actual effect. Given the RBA’s recent record on “jaw boning”, it would be in keeping with this pattern of behaviour if the RBA was trying to lower longer term interest rates by talking about QE in preference to being forced to actually implement it. Recent data suggests a worsening rather than improving of domestic economic conditions so despite Dr Lowe’s efforts to maintain confidence that QE is not going to be necessary, this will also require an actual turnaround in the current direction of the Australian economy.
Amicus is working with its clients to help position their portfolios for a range of economic scenarios including the possibility of QE and other unconventional policy tools being implemented in Australia in 2020 to boost economic activity from the current sluggish levels.