RBA balancing act on an uncertain high wire

Reserve Bank deputy governor Guy Debelle. Picture: John Feder

Up, down or no change. Predicting central bank policy used to be relatively straightforward.

Investors and professional central bank watchers would try to work out what it meant for the official interest rate.

With rates basically at zero, and probably going nowhere for a long time, it’s become a lot harder to know what the central bank is going to do.

Reserve Bank deputy governor Guy Debelle on Tuesday laid out four options for the period ahead: foreign exchange intervention, one final cut in the official cash rate (probably from the prevailing 0.25 per cent to 0.1 per cent), buying more bonds (possibly of different durations) from the government, or possibly taking official rates negative.

There are even more levers, truth be told: the Term Funding Facility, a line of credit available to banks, already jacked up to $200bn last month from $90bn, could be tweaked further.

The interest rate paid on commercial banks’ deposits with the RBA, currently 0.1 per cent, could be changed. Then there’s “forward guidance” —– promising to do things — or even “jaw boning”, or cryptically appealing to banks, governments or markets to do other things or else.

Another official rate cut, the most likely change over the next two months, is more a case of formalising the “zero lower bound” than influencing the economy.

A 0.15-percentage-point cut will have little impact on the ­interest rates households and businesses actually pay.

The lower interest rates go, the harder it is for the commercial banks to pass them on without eroding their interest margins because they can’t pay negative interest rates on deposit accounts without customers withdrawing their money in cash.

All this makes central bank watching a more complex pursuit, but is of little import. The ­salient fact of central banking over the past decade has been general failure to achieve inflation targets, be it here, in the US or in Europe.

Asset prices have soared, to be sure, but consumer prices have stagnated.

With an explosion of policy levers, it will be difficult to know what’s “working” and what’s not.

The era of inflation targeting via a short-term interest rate has been coming to an end for a while. The recession has killed it.

The challenge for central banks will be how to keep interest rates low, what their government owners want and need given their ballooning debt, if inflation begins to rise.