Will interest rates reach zero?

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August 14 2019
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The Reserve Bank of Australia has indicated it will do “unconventional things” to kick-start the Australian economy, which could include cutting rates to zero lower bound.

In response to questioning from the House of Representatives standing committee on economics, Dr Philip Lowe outlined the economic case for zero rates and the lessons learnt domestically through the actions of other central banks.

The governor said that while it is unlikely to pass on four more rate cuts to bottom out at zero, global uncertainty makes such a move impossible to rule out.

“It's possible that we end up at the zero lower bound. I think it's unlikely, but it is possible,” he offered, before conceding that the bank is “prepared to do unconventional things if the circumstances warranted it.”

Mr Lowe went on to indicate that if the world’s economies do see continued rate cuts, Australia would likely follow in their footsteps.

“If, globally, all central banks go to zero, then we would have to consider that as well,” he said.

However, while Australia entering into negative interest rates is an idea that has been entertained, Mr Lowe outlined that he does not consider it an appropriate action for Australia.

"In Switzerland right now the interest rate is minus three-quarters of a per cent, in the euro area it's minus 40 basis points and in Japan it's minus 10. So, some central banks have gone negative. That's one possibility,” said Mr Lowe.

Despite signs “the economy may have reached a gentle turning point”, Mr Lowe said rates will remain low for the foreseeable future.

Explaining that it’s unlikely that rates would rise again until Australia reaches an unemployment rate of 4.5 per cent, Mr Lowe said the goal for the RBA is to have “wage growth consistent with the inflation target”.

“That's the world in which we'll be raising rates.”

About the author

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 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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