Lower rates possible, RBA’s Debelle says

Colin Brinsden, AAP Economics and Business Correspondent
(Australian Associated Press)

 

The central bank has four policy options if the economy needs a further boost, deputy governor Guy Debelle says, indicating it’s possible to lower interest rates further without going negative.

“As the outlook for the Australian economy unfolds, the board will continue to assess the merits of the range of monetary options to best support the economic recovery,” he told the Australian Industry Group on Tuesday.

The Reserve Bank of Australia could extend its bond buying program beyond three-year instruments to longer maturing issues, to keep market interest rates low, Mr Debelle said.

“Foreign exchange intervention is another potential policy option,” he said in his prepared speech.

“However, with the Australian dollar broadly aligned with its fundamentals, it is not clear this would be effective in the current circumstances.”

A third option is to the lower the current structure of interest rates in the economy, both in terms of the target for government bond yields and the borrowing rate the RBA offers to banks from the current 0.25 per cent.

“It is possible to further reduce these interest rates,” he said.

A fourth option would be negative rates, although Governor Philip Lowe has previously warned that while this can stimulate the economy in the short term through a lower currency, the effectiveness in the medium term can wane and encourage households to save more rather than spend.

Mr Debelle said while last week’s fall in the unemployment rate to 6.8 per cent was better-than- expected, the recovery in the labour market was likely to be “bumpy and uneven”.

“We still expect the unemployment rate to rise from here,” he said.

He did not see any risk of a sustained rise in inflation and the high unemployment rate will means wages growth – “which was not strong pre-pandemic” – will remain subdued.

“Overall, the recovery has not been a rapid bounce but more of a slow grind,” he said.

“The virus is having its effect, particularly because of the lockdown in Victoria, but so too is the shortfall in demand that occurs in recessionary conditions.

“That shortfall in demand will be a significant brake on the recovery.”

Mr Debelle believes that until households and businesses are confident about future demand and income, they will be reluctant to spend and invest.

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