Spotlight: Australia's central bank considers "unconventional" ways to stimulate economy
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E-mail Xinhua, August 23, 2019
by Duncan Murray
SYDNEY, Aug. 23 (Xinhua) -- With Australia's interest rates at a historic 1 percent having been lowered twice already this year, central bank officials have considered "unconventional" methods for stimulating economic growth amid fears of a global slowdown.
In the minutes from a meeting released earlier this week, Reserve Bank of Australia (RBA) officials discussed a number of novel strategies which have recently been implemented overseas -- most notably quantitative easing and negative interest rates.
Introduced in the United States in 2009 during the global financial crisis, quantitative easing, which is sometimes referred to as printing money, is the strategy of introducing additional currency to the economy to boost expenditure.
A negative interest rate, simply means an interest rate below zero which would see borrowers essentially rewarded with interest for taking out loans.
Both of these strategies are relatively untested and have economists in disagreement over their effectiveness, however head of Australian macro-economics at BIS Oxford Economics Sarah Hunter told Xinhua that it is comforting the RBA is weighing up all the options.
"The RBA has been clear in terms of effectiveness of the cash rate and as it approaches zero that effectiveness potentially does decline -- it's right for them to consider alternatives, they may well have to intervene and use one of these unconventional policies," she said.
Hunter said that while the current environment would unlikely to warrant the use of these strategies, the circumstances which would not be unimaginable, and that if the RBA were to go down that road they would likely introduce a number of different stimulus methods simultaneously.
"I'd expect them to perhaps use quantitative easing in its strict form, but more generally to use more than one of these different levers if they did feel that cuts to the cash rate weren't doing enough and that they needed to step in and support the economy further," Hunter said.
Economics and applied finance expert John Hawkins from the University of Canberra told Xinhua that as in Japan and a number of European countries, negative interest rates are an unconventional but not unrealistic option.
"If you're trying to get the overall level of interest rates that banks charge their customers down it would be one way to do it," he said.
However Hawkins explained that there is a risk of making the interest rate too negative which could act as a disincentive for banks to give loans at all.
"You probably can't make the interest rate too negative or banks will just keep currency in their vaults, but the experience in Europe and Japan would suggest you can go a bit negative," he said.
One of the barriers is that due to limited implementation overseas, analysts face a stark lack of practical evidence in determining how effective quantitative easing and negative interest rates would be in Australia.
"Part of the challenge in terms of assessing effectiveness is that for a lot of these policies we're not through a full cycle of their use," Hunter said.
"So they've been used, but they in many cases haven't been unwound or removed so we don't fully know the effectiveness of these policies."
While ongoing domestic issues and concerns surrounding international trade have prompted the RBA to review these options now, Hunter said that it would take a "significant deterioration in the economic outlook" to warrant their introduction.
"The economy certainly isn't in a crisis at the moment," Hunter said.
"Growth is certainly soft and we've got headwinds that we're facing domestically however I think it would have to be a material worsening and the potential of the economy going into recession before they really took those particular tools out of their toolbox."
However, the stark fact remains that Australia's interest rate is now lower than ever before, and the broader economy currently is not where the RBA would like it to be.
"The inflation rates are still below the target and they've got the cash rate down to 1 percent so they can't go that much further before it is negative," Hawkins said. Enditem
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