RBA set to move beyond rates

By Cameron Micallef

March 11 2020
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The Reserve Bank of Australia (RBA) is willing to commit to a program of unconventional monetary policy of “acting in the bond market” to keep interest rates low, said its deputy chair.

In a speech about the coronavirus and the Australian economy, Deputy Governor of the Reserve Bank of Australia Guy Debelle noted the likely form of quantitative easing-style program of government bond buying as the RBA sets the official cash rates staying low.

“We need interest rates to be low for a sufficiently long period of time,” Dr Debelle said.

Dr Debelle highlighted the coronavirus impact and market forecasting further rate cuts could mean Australia is forced to go down the unconventional monetary policy route.

“There are scenarios in which we are going to consider that. We want to keep the risk-free rate low. We want interest rates to be low for a long period of time, to see unemployment decline and inflation rise within the inflation target,” Dr Debelle said.

“We talk about the likely future path of interest rates, generally known as forward guidance, to validate that we would be operating in the bond market as necessary to keep government bond rates consistent with our outlook for interest rates.”

The RBA, which recently reduced the official cash rate to a record-low 0.5 of a percentage point, which it previously stated that 0.25 of a percentage point was the lower bound before looking for unconventional monetary policy.

Defying the sceptics, Dr Debelle said: “Monetary policy still works. If you look at the reductions last year, they are transmitting through to the economy pretty much the same way it always has.

“We can’t do anything about the supply side of the economy, but we can sustain demand. The exchange rates still clearly work, putting cash in people’s pockets is still clearly there and we saw the effects of that through the rate cuts last year and we don’t have any reason to think that is different now.”

He believes a combination of fiscal monetary stimulus would work together to help lift the economy out of the dip the coronavirus has provided.

“Fiscal and monetary policy are working to get us through this episode. In the end, we’ll come out of the other side of this because the virus only has a finite life,” Dr Debelle said.

Finally, Dr Debelle highlighted China, which largely saved the Australian economy during the global financial crisis, would look to stimulate, which will support the Australian economy.

“My sense is from listening to the commentary of Chinese policymakers as they have put stimulus back on the top of the agenda,” Dr Debelle concluded.

About the author

Cameron Micallef

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. 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 leverage their insights to grow your portfolio.

About the author

Cameron Micallef

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. 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 leverage their insights to grow your portfolio.

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