QE’s not the only string to Lowe’s policy bow

The RBA’s entry into unconventional monetary policy, if warranted, would be multifaceted, governor Philip Lowe says.

Reserve Bank governor Philip Lowe.

The Reserve Bank of Australia’s entry into unconventional monetary policy, if warranted, would be multifaceted, with governor Philip Lowe saying yesterday there was no “one-size-fits-all” weapon that could lift the economy.

In a testimony before parliament, Dr Lowe said that while ­introduction of quantitative easing was “quite a long way from the central scenario”, it was sensible to prepare, and added that government bond purchases would likely form part of that armoury.

Having cut the official cash rate to a record low of 1 per cent, the RBA is now sitting back to gauge whether its policy tonic will revive the economy.

Still, Dr Lowe’s remarks reveal the RBA is preparing itself to deal with darker times within the economy.

“We could reduce the cash rate down to a very low level, and it’s possible, if the circumstances warrant it, that we could take ­action to lower the risk-free rates further out along the term spectrum,” Dr Lowe said.

“It’s possible that we end up at the zero lower bound. I think it’s unlikely, but it is possible.

“We are prepared to do unconventional things if the circumstances warranted it.”

With markets betting the RBA will have to cut interest rates further, economists are weighing the kind of approach the central bank would adopt if interest rates approached zero.

Many speculate the RBA has already dipped its toes into unconventional policy when Dr Lowe recently told markets to ­expect interest rates to remain low for the long term. Many construed this as a move into explicit forward guidance.

Measures by other central banks showed unconventional policies can clear choked credit channels, and lower yields on longer-dated bonds. But in a note of caution, Dr Lowe said the policy experiment globally was still playing out, so its true worth wasn’t yet fully understood.

“You can point to some successes in lowering government yields and improving the dislocation in credit markets, but we’re a long way from unwinding these measures, so a full evaluation can’t yet be done,” he said.

Dr Lowe said transparent communication with markets would be a key plank of any unconventional policy by the RBA.

“Clear and consistent communication is really important. We’ve seen some instances where the communication wasn’t as clear and consistent as it could have been, and it’s caused problems,” he said.

Dr Lowe indicated he wanted to wait a little longer to see if midyear rate cuts, which coincided with the delivery of income tax cuts, would lift the economy.

He said he expected the impact on consumers would be “significant”.

Overall, Dr Lowe struck an ­optimistic tone and said the economy had reached a “gentle turning point”, and he expected GDP growth to strengthen gradually after a run of disappointing numbers.

But he pointed out risks to the economy from the trade war ­between the US and China.

“The major uncertainty, though, continues to be the trade and technology disputes between the United States and China … This means that we have a lot riding on these disputes being ­resolved soon,” he said.