Reserve Bank of Australia governor Philip Lowe has all but ruled out the chances of the central bank following the US Fed, Bank of Japan, European Central Bank and Bank of England and introducing quantitative easing (QE) in an effort to kick start inflation and boost economic activity.
In his first-ever speech devoted solely to the subject, Dr. Lowe asserted that the central bank would not move to such a tool until it had been forced to cut the cash rate to 0.25%.
His speech came hours after his deputy, Dr. Guy Debelle had warned Australians that low wage rises of between 2% and 3% would be with us for some time to come (See separate story).
QE policies include (overseas) negative interest rates and central bank purchases of government debt.
Dr. Lowe said such policies had largely worked overseas in countries like the EU, Britain, Japan the US and much of Scandinavia.
But he pointed out that the Australian economy was in a much stronger position than these other economies, especially when QE measures had been introduced.
“There may come a point where QE could help promote our collective welfare, but we are not at that point and I don’t expect us to get there,” Dr. Lowe told a dinner of the Australian Business Economists in Sydney.
In particular, Dr. Lowe saw no need for negative interest rates in Australia:
“We are not in the same situation that has been faced in Europe and Japan. 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.
So we are in a much stronger position,“ he told his audience, some of whom have written that such a move could be an option forced on the RBA in the not too distant future.
He also ruled out the core part of QE policies – buying bonds and other securities, saying the central bank has “no appetite to undertake outright purchases of private sector assets as part of a QE program.”
“Our current thinking is that QE becomes an option to be considered at a cash rate of 0.25 percent, but not before that. At a cash rate of 0.25 percent, the interest rate paid on surplus balances at the Reserve Bank would already be at zero given the corridor system we operate. So from that perspective, we would, at that point, be dealing with zero interest rates.
My.. final ..point is that the threshold for undertaking QE in Australia has not been reached, and I don’t expect it to be reached in the near future,” Dr. Lowe told the dinner.
But he made it clear (and supported Dr Debelle’s contention in his speech) that the economy will be stuck in its present rut for some time to come, and the RBA will be doing its best to support it.
The (RBA) Board is … committed to maintaining interest rates at low levels until it is confident that inflation is sustainably within the 2 to 3 percent target range.
“The central scenario for the Australian economy remains for economic growth to pick up from here, to reach around 3 percent in 2021. This pick-up in growth should see a reduction in the unemployment rate and a lift in inflation. So we are expecting things to be moving in the right direction, although only gradually,” Dr. Lowe said.
