Central banks may consider changing tact

With interest rates already at lows around the world and sluggish growth looking unlikely to change, central banks may need to change their approach, according to one Aussie economist.

Last month, Australia’s cash rate was slashed to a historic low by the RBA, while overseas countries such as Japan have even resorted to negative interest rates in a bid to encourage growth.

Since the GFC, there have been 637 interest rate cuts around the world and yet the outlook for growth remains constrained.

However, we may have reached a turning point, with AMP chief economist Shane Oliver saying there may be a shift in economic management ahead.

“Central banks are becoming less enamoured of negative interest rates, a shift in focus away from monetary stimulus towards fiscal stimulus and a stabilisation in commodity prices leading to lessening deflation risk,” Mr Oliver said.

The idea that central banks may move away from monetary policy has picked up steam, reflected partly in higher bond yields.

“Bond yields have been driven higher by a range of things lately including perceptions that central banks have become less interested in using negative interest rates, talk of a refocus from monetary to fiscal policy, receding deflationary pressure from commodity prices, perhaps the realisation that bonds are poor value and heightened expectation of Fed rate hikes,” Mr Oliver said.

That US rate hike is expected to happen later this year and would be just the second in seven years, following a post-GFC period of low interest.

That expectation combined with the European Central Bank (ECB) delaying further action is causing bond yields to rise.

“The rise in bond yields in the last few days was triggered by the ECB leaving monetary policy unchanged and comments by normally dovish Fed president [Eric] Rosengren warning of the risks of waiting too long to raise rates,” Mr Oliver said.

Despite the possibility of central banks changing tact overseas, Mr Oliver said Australian interest rates are likely to remain low for the foreseeable future.

“While the RBA may still need to cut rates again to help push inflation back up and keep the Australian dollar down, it’s unlikely that Australia will need zero interest rates or quantitative easing.”

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