(Australian Associated Press)
Treasurer Josh Frydenberg doesn’t expect the central bank will need to go down the path of unconventional monetary policy to give the Australian economy a boost.
Reserve Bank governor Philip Lowe used an address to a business economists dinner on Tuesday to deliver an academic explanation of what options there are for monetary policy ahead.
“Our current thinking is that QE (quantitative easing) becomes an option to be considered at a cash rate of 0.25 per cent, but not before that,” Dr Lowe said.
“And I don’t expect it to be reached in the near future.”
However, it has only two rate cuts left in its arsenal with the official cash rate already at a record low 0.75 per cent.
“I think the governor is saying that QE is not likely,” Mr Frydenberg told Sky News on Wednesday.
“But what he is saying is that he’s going to continue to watch the interest rates.”
The treasurer said the Reserve Bank would also consider the actions of others, with some 50 central banks around the world having cut their rates.
Labor frontbencher Andrew Leigh agreed that most people recognise that 0.25 per cent is probably as low as you can go in terms of the cash rate.
“Which means the pressure really comes onto fiscal policy,” Dr Leigh told reporters in Canberra.
“The treasurer’s ham-fisted approach to fiscal policy is working at odds with what the Reserve Bank is trying to do with monetary policy, although they’re really running out of runway.”
Financial markets see a three-in-five chance of the Australian central bank cutting the cash rate to 50 per cent when its board returns from the summer recess in February, but little risk of a further reduction beyond that at this stage.
Dr Lowe reiterated that negative interest rates are “extraordinarily unlikely” as Australia was not in the same situation as parts of Europe and Japan where economic growth has gone backwards.
“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,” he said.
On QE, Dr Lowe said he had “no appetite” to go down the path of buying private sector assets.
Quantitative easing is a mechanism that allows a central bank to pump money into the economy by buying government bonds and other securities
However, if it were to take the decision “we would purchase government bonds, and we would do so in the secondary market”.
“An important advantage in buying government bonds over other assets is that the risk-free interest rate affects all asset prices and interest rates in the economy,” he said.
“So it gets into all the corners of the financial system, unlike interventions in just one specific private asset market.”