Quantitative easing on the table: RBA

Quantitative easing in Australia could start early next year and if geopolitical risks get worse it could happen sooner.

Reserve Bank deputy governor Guy Debelle. Picture: John Feder

Quantitative easing in Australia could start early next year and, if the US-China trade war, Brexit and other geopolitical risks like Hong Kong and Australia’s relationship with China go from bad to worse, it could happen sooner.

But, while Reserve Bank deputy governor Guy Debelle indicated such unconventional monetary policies like bond buying could start when the cash rate hits 0.5 per cent, the RBA may hold off until it hits zero.

His speech to the Economic Society in Canberra spelt out the economic risks from the recent breakdown of the “rules-based global trading system” as the US takes China to task over “unfair trade practices”, including alleged intellectual property theft, forced technology transfer, espionage and currency manipulation.

Dr Debelle said “despite some flaws that system has delivered sizeable benefits for global growth and welfare” and “Australia has clearly been a major beneficiary of that system”.

“The current threats to the system are a significant risk to both Australia and the world,” he said.

Dr Debelle’s message echoed that of his boss, RBA governor Philip Lowe, who told the Economic Policy Symposium on Sunday “we are experiencing a period of major political shocks that are turning into economic shocks”.

As is often the case, financial markets are intently focused on the response of policymakers to such shocks.

The Australian dollar last traded

Asked how low interest rates could go, Dr Debelle referred to the experience of the US, Canada and Britain, saying: “When they got down to their lows it was somewhere around about zero, quarter, half a per cent. And so I think that probably gives us some sort of guide as to what the equivalent might be here.

“It’s a good question. It’s one we’re spending a fair bit of time thinking about, hopefully a question that we don’t actually have to, in the end, worry about. But there’s some chance we do.”

Reinforcing the minutes of the August board meeting, which said the board “reviewed the experience of other advanced economies with unconventional monetary policy measures over the preceding decade”, Dr Debelle added that “we have spent a fair bit of time looking at the experience of countries around the world and, at least looking at the experience in the US, the UK and Canada, would give you an idea of a number somewhere around there that may be reasonable to map across to Australia”.

He was also asked what the RBA would do if the cash rate, now at a record low of 1 per cent, hit 0.5 per cent.

“If you look at where the others landed it was somewhere (near) quarter to half (a per cent), somewhere around there. If we are not achieving our objectives we have a mandate to try and achieve our objectives, which probably requires doing something rather than doing nothing for a long period of time,” he said.

So the RBA won’t stand idly by if it gets to the effective lower bound and finds more stimulation is needed.

With Dr Debelle highlighting the role of the currency as a “shock absorber” and indicating so-called “unconventional” policies may start when the cash rate hits 0.5 per cent, the Australian dollar could bear the brunt of such policies, unless the Federal Reserve starts cutting rates more aggressively. However, assets like bonds, property and shares may be supported by an extended period of near zero rates.

Countries that go to near zero or negative rates have tended to keep them for 10 years or more.

A 0.5 per cent cash rate has almost been fully priced in by the market for March and the consensus among economists is it will hit 0.5 per cent in the first quarter of 2020.

“At this stage we think the RBA will try to avoid measures such as QE as much as possible, preferring to take cash down to 0.25 per cent or even zero if additional stimulus is needed before it looks at explicit QE,” ANZ’s head of Australian economics, David Plank said.

“Unless there is a shock of some sort that risks pushing bank funding costs sharply higher, in which case targeted measures such as LTROs (long-term refinancing operations) will come on to the table.”