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RBA governor Philip Lowe says negative interest rates aren't on the cards – but outlined what he'd need to pull the trigger on quantitative easing

James Hennessy

In recent months, the phrase on everyone's lips has been "unconventional monetary policy".

As the Australian economy lags, interest rates are slashed, and the government remains committed to maintaining a surplus – possibly at the expense of necessary investment – Reserve Bank of Australia governor Philip Lowe has been implying a possible turn to unconventional monetary policies like negative interest rates and quantitative easing.

Quantitative easing (QE), in short, is printing money without actually physically printing money. A central bank like the RBA will purchase assets such as existing government bonds, in order to pump money directly into the financial system. Negative interest rates – which have been seen in Europe and Japan – would mean that loan holders would actually earn money on their debts, and consumers would effectively pay banks to hold their money.

Back in August, Lowe said the RBA was "prepared to do unconventional things if the circumstances warranted it," though he did not venture into specifics.

Now, Lowe has issued his most explicit message on unconventional monetary policy in Australia yet – and, in short, it probably isn't happening any time soon. But, given certain conditions, it could.

Speaking before an Australian Business Economists dinner on Tuesday night, Lowe outlined the international experience with unconventional policy, and how experiments abroad might have implications for what Australia does in the face of a sluggish economy.

In short, Lowe said the evidence from abroad broadly suggested some unconventional policy measures – including negative interest rates and asset purchases – had been to some extent successful, but was slightly more cautious on what the implications were for Australia.

Quantitative easing could happen – but it would require extraordinary conditions

Despite speculation by some economists that the RBA would implement QE when the cash rate hit 0.5%, Lowe suggested the threshold was more likely 0.25%.

It isn't just about the interest rate, however. Lowe also said QE would only be considered if there were strong evidence the RBA was moving away from its goals on inflation and full employment.

Lowe stressed any QE program in Australia would be restricted to the purchase of existing government securities – not private assets, an idea which has been floated by some economists.

"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," Lowe said. "We have no appetite to undertake outright purchases of private sector assets as part of a QE program."

According to Lowe, Australia's financial system is more solid than some in Western Europe and Asia, some of which are experiencing interest rates of 0%.

"Our growth prospects are stronger, our banking system is in much better shape, our demographic profile is better and we have not had a period of deflation," he said.

Negative interest rates are 'extraordinarily unlikely'

On the prospect of negative interest rates, however, Lowe was much firmer.

"Our growth prospects are stronger, our banking system is in much better shape, our demographic profile is better and we have not had a period of deflation," he said.

"So there is no need to change our normal market operations to do anything unconventional here. Negative interest rates in Australia are extraordinarily unlikely. We are not in the same situation that has been faced in Europe and Japan."

Unlike with quantitative easing – which Lowe says may have had a stabilising effect in the economies it was tested in – he was less convinced of the utility of negative interest rates.

"While negative rates have put downward pressure on exchange rates and long-term bond yields, they have come with other effects too," he said.

"It has become increasingly apparent that negative rates create strains in parts of the banking system that can impair the ability of some banks to provide credit."

Steven Dooley, currency strategist at Western Union Business Solutions, said in a note provided to Business Insider Australia that the governor's comments made clear his position on negative interest rates. "In the arcane word of global central banking, that’s about as forthright as you can be," he said.

"Lowe is clearly saying the negatives outweigh the positives.”

But, as Lowe has strongly suggested in the past, he clearly doesn't think the RBA alone can be responsible for righting the ship which is the Australian economy, suggesting the government also has an essential role to play with spending.

"I would hope other public policy options were also on the country's agenda," he said.