The Reserve Bank of Australia’s governor, Philip Lowe, has issued his support for “valuable” unconventional monetary policy tools (UMPTs) like negative interest rates and quantitative easing, a week after dropping interest rates to a record-low of 0.75 per cent.
Lowe said UMPTs were introduced during the 2008 Global Financial Crisis to respond to the tough market, and helped banks at the time.
“The overall message is that UMPTs helped central banks that deployed them address the circumstances presented by the crisis [the GFC] and the ensuing economic downturns and that, despite the challenges these instruments pose, they are valuable additions to the central banking toolbox,” he said.
Economist Stephen Koukoulas is all for the Reserve Bank “throwing everything at the economy while it’s currently going through this soft patch”.
And that means negative rates.
“It’s an unusual issue,” he said, but not cutting is “as absurd as a firefighter unwilling to put out a fire because it might waste water”.
Ultimately, with low wage growth, inflation persistently below the 2-3 per cent target, and an unemployment rate resistant to downward pressure, experts are saying Aussies should gear up for negative rates and quantitative easing.
What will negative interest rates mean for Aussies?
According to IbisWorld, a negative interest rate policy would have a major impact on the viability of Australian banks.
Negative rates have been enacted by the European Central Bank, Japan, Germany, Switzerland, Sweden and Denmark over the past decade, and in turn are paying interest on the reserves they keep in their accounts at the RBA, rather than receiving it.
“[It] forces banks to lend more funds at any interest rate consumers and businesses are willing to accept, as the alternative is keeping funds at the RBA where a loss is guaranteed,” IBISWorld’s senior industry analyst, Jason Aravanis said.
“The benefits for households and businesses seeking to borrow are immense, as banks will be eager to get money out the door as much as possible.”
After sensing trouble times ahead for the market, major Danish bank, Jyske Bank, offered borrowers home loans with interest rates of minus 0.5 per cent.
But while negative rates can stimulate the economy by encouraging lending, the policy can pose a threat to the banking industry.
‘The capacity for banks to charge interest on deposits is extremely limited, as retail depositors are likely to withdraw funds entirely to preserve their wealth,” Aravanis said.
“As a result, negative interest rate policies represent a serious threat to the profitability of the big four banks in Australia, which enjoy some of the highest margins in the developed world.”
What will quantitative easing mean for Aussies?
Quantitative easing (QE) involves central banks creating new money to purchase safe assets like government bonds and mortgage-backed securities, but experts say its effectiveness in Australia would be limited.
“The RBA has stated that it would consider using a QE-style program to inject more money into the economy. Ideally, the recipients of these funds would use them to make greater investments and generate economic activity,” Aravanis said.
“However, the effectiveness of this policy in Australia is likely to be limited, given the existing abundance of money supply.”
On the plus side, it could, Aravanis said, push private investors to move funds out of risk-free debt assets into risky investments like corporate debt, in turn expanding businesses and creating employment.
But, there are negative side effects.
“It is also possible that these funds will flow into the property market instead. Consequently, this measure risks only further inflating housing prices rather than stimulating the economy.”
Quantitative easing would also affect the interest rates on assets denominated in Australian dollars, which would reduce the attractiveness of Aussie debt assets.
“By depreciating the currency, the RBA would potentially improve export competitiveness and deliver an increase in inflation by making imported goods more expensive.
“However, this strategy’s effectiveness is predicated on other central banks not seeking to devalue their own currencies.
“Given that central banks in most of Australia’s major trading partners have also recently cut their cash rates, it is unlikely that this method would deliver economic stimulus.”
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