The Reserve Bank of Australia (RBA) has dismissed the possibility of a negative rate scenario, saying the country remains in a strong position.
Negative rates in Australia are “extraordinarily unlikely”, said the RBA Governor Philip Lowe in a speech during the Australian Business Economists Dinner in Sydney.
The negative rate policy is a trend commonly observed in European countries, including Denmark, Sweden and Switzerland. Outside of the European region, only Japan has tried to go beyond zero rates.
“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 said.
Lowe said it is not clear whether the experience with negative rates has been a success.
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“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. Negative interest rates also create problems for pension funds that need to fund long-term liabilities,” he said.
Furthermore, Lowe said negative rates could encourage households to save more and spend less, making people more cautious.
Interest rate to stay low
The central bank has slashed the official cash rate three times this year, bringing it to 0.75% in October. While Lowe dismissed negative rates, he did not rule out further rate cuts in the future. However, he said the economy is now enjoying the impacts of the recent rate and tax cuts and the upswing in housing prices.
“The board is also committed to maintaining interest rates at low levels until it is confident that inflation is sustainably within the 2-3% target range,” he said.
The RBA is expecting the Australian economy to hit a 3% growth 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,” Lowe said.
Market watchers are expecting rate cuts to hit 0.25% next year. At this point, the RBA could consider undertaking quantitative easing.
“The threshold for undertaking QE in Australia has not been reached, and I don't expect it to be reached in the near future,” Lowe said.
However, he said there are circumstances where QE would help.
“The international experience is that in stressed market conditions, the central bank can help stabilise the situation by buying government securities. That experience also suggests that QE does put additional downward pressure on both interest rates and the exchange rate,” Lowe said. "In considering the case for QE, we would need to balance these positive effects with possible side-effects.
