Global spread of coronavirus hastens end of monetary policy era

There’s no denying Australia is in the twilight of monetary policy, hastened by the growing global spread of the coronavirus.

A cut on Tuesday and another in April — now the consensus among economists — would bring the Reserve Bank’s cash rate to 0.25 per cent, a level below which governor Philip Lowe has said he is not prepared to go.

Which means the era of conventional monetary policy in Australia could be over.

Many people fret that Lowe has used up his ammunition too early, and we will go into the next downturn with the central bank largely an interested bystander. Sure, they can buy bonds (which Lowe says he is prepared to do) and push rates below zero (which he says he isn’t prepared to do), but there’s no real evidence that such measures overseas have made much difference in boosting real economic growth.

Negative rates, in particular, are likely to prove damaging. They hurt banks and make them less willing to lend at a time when we want the opposite.

Rates below zero also fuel financial instability and the misallocation of capital.

No wonder, then, that Lowe has popped up this year talking about how he is talking to Treasury about handing over the responsibility of managing the cycle to fiscal authorities. What that looks like is unclear, but Lowe has said it was a hot topic among central bankers across the developed world, all of whom face similar issues.

With Scott Morrison’s plans for “modest, targeted and scalable” fiscal support to industries hurt by the travel ban, we may have our first glimpse of a post-RBA world — a world in which Treasury bureaucrats, overseen by politicians, guide the Australian ship through the shoals of economic fate

Analysts agree that a Rudd-style large-scale stimulus package is not appropriate right now. What is needed is more micro-level measures to keep businesses going and keep them hiring, or at least stop them laying off workers. In other words: fend off a recession. That used to be the RBA’s job.