Australian Financial Review
The Reserve Bank will cut its cash rate twice more this year, beginning tomorrow, to take it to 0.75 per cent, according to the median forecast in The Australian Financial Review‘s latest quarterly economists’ survey,
A cut of 0.25 of a percentage point by the RBA governor Philip Lowe on Tuesday, following the June meeting cut, would bring the cash rate to a record low of 1 per cent.
Even if Dr Lowe chooses not to ease again this week, all surveyed economists believe the governor will cut at least once more this year, with a strong majority suggesting twice more.
“Further reductions in the cash rate below 0.75 per cent may be needed if the Aussie dollar does not move lower, or if the global economy is weaker than expected,” ANZ’s David Plank said.
Beyond that, the rough consensus among respondents was that the RBA would be reluctant to push rates below 0.5 per cent, and would instead consider implementing more unorthodox measures.
This would most likely be quantitative easing, or QE, a bond-buying program of the type pursued at various times since the GFC in other major economies and regions, such as the United States, England, Europe and Japan.
For now, Dr Lowe has flagged he is not in favour of an Aussie QE program. Dr Lowe recently remarked that “fiscal policy and structural policies have a role to play, so I’m hopeful, and I think it’s realistic to expect us to be able to keep away from these very low rates and unconventional measures”.
St George’s Besa Deda said “a cash rate of 0.5 per cent could be the line in the sand for QE, especially if no stimulus from fiscal policy is forthcoming”.
“I think the RBA will cut to 0.5 per cent but will be loath to cut below that due to financial distortions,” David Bassanese of BetaShares agreed.
Instead, the central bank could resort to buying bonds, he said.
However, Mr Bassanese added: “I think significant QE is unlikely unless there is a global recession or the local unemployment rate pushes through 6 per cent even after the RBA has cut the cash rate to 0.5 per cent.”
Sarah Hunter of BIS Oxford Economics expects rates to fall to 0.75 per cent by the end of this year, and that this will provide enough stimulus to push the jobless rate below 5 per cent – assuming that promised income tax cuts from middle-income workers are pushed through.
She agreed that the RBA would not consider QE “unless the economy moved markedly closer to a recession, which if it materialised would mean that some sort of crisis/global recession had taken hold”.
The RBA has pivoted to using an unemployment rate target to guide its monetary policy decisions. In a speech in June, assistant governor Luci Ellis said there was too much spare capacity in the labour market and that the jobless measure needed to fall at least as far as 4.5 per cent to push inflation sustainably higher and back into the bank’s 2-3 per cent target range over the medium term.
But AMP Capital’s Shane Oliver said: “Given the intensely competitive economic environment and technological innovation, even 3.5 per cent unemployment may not be low enough” to drive wages and inflation sustainably higher.
Katrina Ell of Moody’s agreed, saying she was “sceptical whether RBA cash rate cuts will deliver meaningful improvements in wage growth, given the structural impediments to stronger wage growth”.
The survey showed the median forecast was for unemployment to have only marginally improved to 5.1 per cent by this time next year, despite expectations that rates will have reached 0.75 per cent by that time.
Dr Oliver sees the potential for rates to fall to 0.5 per cent as soon as February next year.
“Beyond that point though it will become harder for the banks to pass on RBA rate cuts without lowering their profit margins significantly, which will threaten bank lending, and so the RBA will put a halt to further rate cuts around that point,” he said.
“Hopefully by then fiscal stimulus will have been ramped up to help the RBA. But if not and if the economy has still not improved enough the RBA will likely have to consider some form of quantitative easing.”
RBC Capital’s Su-lin Ong also predicted the RBA would cut to 0.5 per cent and then consider QE.
“A key caveat to this may be the extent to which the banks pass on future rate cuts,” Ms Ong said. “The risk that future cuts are not fully passed on may step up the pressure on QE sooner rather than later.”
Deutsche Bank’s Phil O’Donaghoe, however, said unconventional monetary policies were “a long way off in Australia”.
“The RBA will have to consider it [QE] when and if the financial system becomes dysfunctional – that is, when and if credit creation becomes impaired,” Mr O’Donaghoe said.
“There are absolutely no signs of that yet, so what would QE be designed to achieve? Printing money to engineer a lower unemployment rate?
“A far more sensible policy option would seem to be conventional fiscal policy to respond to shocks once conventional monetary policy reaches its limits.”
Dr Oliver agreed that alternative measures to QE would be preferable should economic conditions deteriorate sufficiently to justify more extreme policy responses.
“A better approach may be to work with the government to help fund public spending on, say, infrastructure or ‘cheques in the mail’ to low and middle-income households with ‘use-by dates’,” he said.
Stephen Anthony of Industry Super Australia said evidence from overseas suggested QE programs ultimately did more harm than good, saying such measures had fuelled asset price inflation while “choking off” business investment globally.
“Effectively, QE makes bond-like assets a safe bet while raising hurdle rates for real investments. It encourages non-financial corporations to buy back shares or issue dividends.
“In other words: it is a bear pit into which economies are falling.”
Article appeared in The Australian Financial Review on 1 July 2019.
Article written by Patrick Commins.