Reserve Bank governor Guy Debelle has kept the door open to another interest rate cut, saying the bank has room to slash rates without going into negative territory.
As the ABS released data showing payroll jobs fell by 0.7 per cent over the month to September 5, Dr Debelle said on Tuesday that the RBA was assessing different policy options as the outlook for inflation and jobs was inconsistent with “its objectives over the period ahead”.
He told an Ai Group videoconference that the economic recovery “has not seen a rapid bounce but more of a slow grind”.
“The virus is having its effect, particularly because of the lockdown in Victoria, but so too is the shortfall in demand that occurs in recessionary conditions,” Dr Debelle said.
“Until households and businesses are confident about future demand and income, they will be reluctant to spend and invest.”
The deputy governor said the RBA estimates the lockdown in Victoria has subtracted roughly 2 per cent from national GDP in the September quarter.
He said the 7 per cent fall in GDP in the June quarter was “the largest peacetime economic contraction since the 1930s”, but would have been much worse had it not been for government support measures.
“Fiscal policy is having the largest impact in shaping the outcomes in the economy,” he said.
But monetary policy is also playing its part and could do even more.
“The monetary policy action taken by the Reserve Bank since March has a number of elements which complement each other,” Dr Debelle said.
“They are aimed at supporting the recovery by lowering borrowing rates for households and business as well as the government and supporting the supply of credit.”
On March 19, the Reserve Bank took the official cash rate to a record low 0.25 per cent, made $90 billion of cheap loans available to commercial banks – later increased to $200 billion – and started buying government bonds to push down three-year interest rates (a form of quantitative easing).
Dr Debelle said the policy measures had increased the bank’s balance sheet from $170 billion to $300 billion and successfully reduced borrowing costs for households and businesses.
But he said the RBA might have to do more to boost inflation and tackle rising unemployment.
“Under [our] central scenario, it would be more than three years before sufficient progress was being made towards full employment to be confident that inflation will be sustainably within the target band,” Dr Debelle said.
To reach its targets more quickly, the RBA could expand its bond-buying program to include 10-year bonds, but very few financial instruments in Australia base their price off these yields.
Dr Debelle said foreign exchange intervention was another option, but noted the Swiss experience over the past decade shows fiddling with currencies when they are near their fundamental value, as the RBA considers the Australian dollar to be, can have adverse consequences.
“A third option is to lower the current structure of rates in the economy a little more without going into negative territory,” Dr Debelle said.
“The remuneration on [exchange settlement] balances is currently 10 basis points, the three-year yield target is at 25 basis points and the borrowing rate of the TFF is also 25 basis points.
“It is possible to further reduce these interest rates.”
Dr Debelle presented negative rates as the bank’s fourth option, but said the jury was out on whether they worked.
“In the short term, they can contribute to a lower exchange rate. In the medium term, the effectiveness can wane including through the effect on the financial system,” he said.
“Negative rates can also encourage more saving as households look to preserve the value of their saving, particularly in an environment where they are already inclined to save rather than spend.
“That is, the income effect can be larger than the substitution effect.”
Asked whether the economy would suffer a double-dip recession in 2021 as a result of cuts to JobSeeker and JobKeeper, Dr Debelle said it would depend on the policies included in the budget on October 6.
“It’s true that some of the income support is tapering off over the coming months. That said, household incomes and household cash flows have been boosted by a number of measures,” he said.
“And the household sector has actually saved a reasonable amount of that, which in aggregate at least will give some capacity to deal with that expected taper.”
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