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Are we reaching the end of the monetary policy rope?

By Cameron Micallef · October 02 2019
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Are we reaching the end of the monetary policy rope

Are we reaching the end of the monetary policy rope?

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By Cameron Micallef · October 02 2019
Reading:
egg
egg
Are we reaching the end of the monetary policy rope

Following yesterday’s reduction of the official cash rate to a new historic low, the effectiveness of monetary policy without fiscal stimulus is being questioned.

The Australian Institute has taken the stance that monetary policy becomes less effective as the official cash rate falls, due to investments losing their responsiveness as each reduction takes place.

According to the institute, the Reserve Bank of Australia’s (RBA) governor has “virtually” said monetary policy in Australia is no longer effective, and the institute has expressed the opinion that such an economic burden should be taken up by more active fiscal policy. 

It referenced the RBA’s own thinking, citing Dr Philip Lowe’s comments from July, where he said that while “monetary policy does have a significant role to play and our decisions are helping support the Australian economy… we should not rely on monetary policy alone”. 

As the flow-on effects of less effective monetary policy start to be seen, the Australian Institute said the situation will occur where the government “only has one arrow left in its quiver”. 

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“It must use fiscal policy to stimulate the economy,” it concluded.

The case for fiscal stimulus

It therefore begs the question, how effective is fiscal stimulus as a policy?  

Antipodes’ client portfolio manager, Alison Savas, previously explained why fiscal stimulus has worked for foreign markets.

She outlined how in markets where fiscal stimulus has been required, monetary policy has not generated any economic activity.

“If you haven’t owned assets, it (monetary policy) has not benefited you,” she flagged, stating that ultimately, the answer is fiscal stimulus. 

While the world is worried about following Japan into negative interest rates, Ms Savas offered up a perspective that monetary stimulus has not generated economic activity globally.

Ms Savas even noted that the European Union said it had reached its limits to what monetary policy can do.

The portfolio manager is not alone in arguing for fiscal stimulus, citing the president-elect of the European Central Bank, Christine Lagarde, who has urged countries that have surpluses to start spending.

Are we reaching the end of the monetary policy rope?
Are we reaching the end of the monetary policy rope
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About the author

Cameron is a journalist for Momentum Media's nestegg. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leveraging their insights to grow your portfolio.

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About the author

Cameron is a journalist for Momentum Media's nestegg. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leveraging their insights to grow your portfolio.

Join The Nest Egg community

We Translate Complicated Financial Jargon Into Easy-To-Understand Information For Australians

Your email address will be shared with nestegg and subject to our Privacy Policy

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