Central banks around the world, including Australia’s Reserve Bank, are under increasing pressure to cut interest rates to stimulate their economies.
It comes as the European Central Bank cut its benchmark deposit rate further into negative territory (-0.5 per cent from -0.4 per cent), and reintroduced a bigger-than-expected stimulus package – pledging to buy 20 billion euros ($32 billion) worth of bonds every month, indefinitely.
More than 30 countries have lowered their benchmark borrowing rates this year amid rising concerns about slowing growth, recessions, trade wars and a potentially chaotic Brexit.
The last time so many policymakers cut rates or introduced stimulus at the same time was during the global financial crisis, a decade ago.
This will place “additional pressure on the Reserve Bank to cut rates further, given an appreciating exchange rate would undo some of the benefit of lower interest rates locally,” NAB chief economist Alan Oster wrote in a note.
Australia’s cash rate is sitting at a record low 1 per cent, following two back-to-back rate cuts in the past few months.
However, the RBA may need to do a lot more heavy lifting and cut rates to a new low of 0.25 per cent by the middle of next year, according to the revised (and more downbeat) forecasts from ANZ and National Australia Bank in the past week.
The biggest winners from these low rates will be those taking out a mortgage to buy a home, while the most disadvantaged will be Australians who rely on their bank savings to earn interest.
Both major banks already expected Australia’s central bank to cut rates to 0.75 per cent in November.
But the next cut might happen as soon as October “if there was further weakness in the labour market revealed next week”, Mr Oster added.
On Thursday, the Bureau of Statistics will unveil its eagerly-awaited unemployment figures, and if it rises sharply above its current 5.2 per cent level the RBA will be concerned.
The Reserve Bank has been particularly vocal about wanting to see the jobless rate fall to 4.5 per cent to boost wage growth, consumer spending, inflation and (eventually) GDP growth – all of which are at or near decade lows.
“[Economic] growth continues to undershoot the Reserve Bank’s forecasts, such that unemployment is likely to edge higher, with inflation stuck below the 2 to 3 per cent target band,” Mr Oster said.
Because of that, he predicts the RBA will implement a further cut (down to 0.5pc) in February and “unconventional policy” (quantitative easing, in other words).
RBA governor Philip Lowe told Parliament, in early August, that all options were on the table if the domestic economy worsens, including cutting rates to zero or even negative levels.
“It’s possible we end up at the zero [rate] lower bound. I think it’s unlikely but it is possible,” he said at the time.
“We’re prepared to do unconventional things if the circumstances warranted it.”
NAB believes this may involve buying government bonds or “long-dated purchase agreements to lower bank funding costs”.
“We think the RBA will be extremely reluctant to consider a negative cash rate,” said ANZ’s head of Australian economics David Plank.
Like his fellow economists at NAB, he agrees: “The rate cuts could come sooner if the [weaker] domestic data warrants.”
In the past few months, RBA governor Philip Lowe has pleaded for the Morrison government to borrow more money – at record low rates – to pay for fiscal stimulus measures.
These measures might include new infrastructure investment, cash handouts or even bringing forward the $158 billion income tax cuts, which are set to be introduced in three stages until 2024-25.
“Unless the government delivers a meaningful fiscal stimulus, a further cut to 0.25 per cent by mid-2020 is likely, along with the adoption of non-conventional monetary policy measures,” Mr Oster said.
However, Dr Lowe’s pleas for extra spending appear to have fallen on deaf ears, particularly due to the strong desire on both sides of politics to bring the budget back into surplus, with the government pointing to its tax cuts and current infrastructure spending plans as providing enough stimulus.
Global round of rate cuts
Before the RBA meets again in October, several central banks around the world will have cut their rates even further – or signalled an intention to introduce economic stimulus.
The Bank of Japan will make its decision on Thursday (AEST), with Commonwealth Bank senior economist Belinda Allen expecting the BoJ to “leave monetary policy unchanged [but] the risks are growing for further policy easing”.
Meanwhile, the US will almost certainly receive a 25-basis-point rate cut from its Federal Reserve (Fed) on Thursday morning (AEST) – an attempt to protect the US economy from slowing growth, partly due to Mr Trump’s protracted trade war with China.
Markets have priced in a 94 per cent likelihood of a US rate cut next week.
That will not be enough to satisfy US President Donald Trump, who has been urging the Fed “boneheads” to aggressively cut rates into negative territory.
But Mr Trump’s tweets, posted after the ECB decision, suggest he is even more incensed by the independent Fed’s refusal to bend to his will.
“They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting US exports … And the Fed sits, and sits, and sits,” he tweeted.
“They get paid to borrow money, while we are paying interest!”
Negative rates are usually a last resort, used reluctantly by central banks to battle weak economic growth.
The US President also did not address the risks or financial market tensions that central banks in Europe and Japan have confronted as a result of their negative rate policies – or the larger issue that negative rates have not yet secured higher growth or higher inflation for those economies.