Homeowners can forget about “negative” or “zero” interest rates in Australia, with the Reserve Bank governor Philip Lowe signalling 0.25 per cent is as low as he will go.
In a speech to the Australian Business Economists Dinner in Sydney on Tuesday night, Dr Lowe also outlined the “unconventional” monetary policy options that could be used to stimulate the economy including quantitative easing, a method not used since the Great Depression in the 1930s.
“One recurring theme of my talks over the years has been the likelihood that interest rates will remain low for an extended period – certainly, much lower, on average, than before the global financial crisis,” he said.
“Low-interest rates are not a temporary phenomenon. Rather, they are likely to be with us for some time and are the result of some powerful global factors that are affecting interest rates everywhere.
“Given this assessment, it is not surprising that there is a lot of discussion internationally about the use of so-called ‘unconventional’ monetary policies. People are rightly asking: if interest rates are going to stay low and be constrained by a lower bound, what other monetary policy options are there?”.
But he’s described negative interest rates and quantitative easing as “highly unlikely” arguing Australia’s economy remains in better shape than many overseas.
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“The threshold for undertaking Quantitative Easing in Australia has not been reached, and I don’t expect it to be reached in the near future,” Dr Lowe said.
“In my view, there is not a smooth continuum running from interest rate reductions to quantitative easing. It is a bigger step to engage in money-financed asset purchases by the central bank than it is to cut interest rates.”
Colloquially known as “printing money”, quantitative easing involves the Reserve Bank buying financial assets, such as government bonds, in order to continue to supply money to the economy if the cash rate has fallen to zero.
“If – and it is important to emphasise the word if – the Reserve Bank were to undertake a program of quantitative easing, we would purchase government bonds, and we would do so in the secondary market,” Dr Lowe said.
But the good news for families paying off a home loan is the RBA believes rates are likely to stay low for the foreseeable future.
However, Dr Lowe described negative or below-zero interest rates as highly unlikely.
“This is one tool that is truly unconventional,” he said.
“Prior to the financial crisis, it was widely thought that zero was the lower bound for the policy interest rate – so it was common to talk about the ‘ZLB’, or the zero lower bound. It was thought that if interest rates went below zero, people would hold their savings in banknotes rather than be charged by their bank to deposit their money.
“While countries with negative interest rates have seen some shift to banknotes, it has been on a limited scale only. This reflects the use of bank deposits for making transactions and the fact that most banks in countries with negative interest rates have set a floor of zero on retail deposit rates.
“These banks have judged that it doesn’t make sense, either commercially or politically, to charge households and small businesses negative interest rates on their deposits.”
Labor shadow treasurer Jim Chalmers said the Liberals have left all of the heavy lifting to the Reserve Bank which has already forced them to cut interest rates to historic lows.
“If the Government was doing such a good job managing the economy then the Reserve Bank wouldn’t need to consider such drastic measures,” he said.