Updated: Oct 29, 2019
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The Reserve Bank may be printing money and buying bonds within 12 months as the central bank doubles down on its easing bias, but "the jury is still out" when it comes to unconventional monetary policy measures, top economists warn.
The Reserve Bank sliced another 25 basis points off the cash rate on Tuesday, taking official rates to a fresh record low of 0.75 per cent in its third cut this year.
The Australian Financial Review’s economist survey for the September quarter indicates the cash rate will hit 0.5 per cent by June 2020.
Beyond that point, on the cusp of a zero per cent cash rate, the case for deploying quantitative easing (QE) strengthens, economists say.
But not everyone is convinced QE is the right path for the Reserve Bank, although it is a necessary consideration of policy thinking. "The jury is still out on unconventional easing," said Andrew Ticehurst, fixed income strategist at Nomura.
Other economists were more forceful in their disagreement: “The case for such policies does not exist, and barring a major crisis, it should not be undertaken,” said ING Bank economist Rob Carnell.
“The RBA should resist being frog-marched into such policies by the big-three central banks. The damage from such policies far outweighs the benefits.”
Economists are uncomfortably aware that there are only three quarter-point cash rate cuts left before Australia joins parts of Europe and Japan in the murky world of zero and negative interest rates.
Tony Morriss, chief economist for Australia at Bank of America Merrill Lynch said that, if interest rates hit 0.5 per cent, the Reserve Bank is likely to reassess its policy options rather than continuing on the path to zero.
“We are likely to see forward guidance, liquidity and credit measures and/or asset purchases long before negative rates would be considered,” the economist said.
“We hope these measures are not necessary, as one potential risk is that inflation expectations will be anchored at a lower level that makes normalisation of policy more difficult over time,” he said.
Commonwealth Bank chief economist Michael Blythe agreed the Reserve Bank appears to be considering explicit forward guidance.
In the central bank’s August policy statement, governor Philip Lowe said: “It is reasonable to expect that an extended period of low interest rates will be required in Australia.”
QE would become of interest if economic growth remains well below trend (at 1.4 per cent in the second quarter), the unemployment rate fails to move closer to 4.5 per cent (from 5.3 per cent) and inflation remains below target (at 1.6 per cent).
"A global deterioration and other central banks implementing further unconventional measures could also lead the RBA to start quantitative easing here," Mr Blythe said.
But this would lock the RBA into QE as long as other central banks are doing it, said Matthew Peter, chief economist at QIC.
"A small, open economy like Australia would be unable to move too far ahead of the rest of the world without risking a sharp appreciation in the exchange rate, and unlike the post-GFC world, this time around Australia will not be saved by China-generated mining boom," Dr Peter said.
UBS' Carlos Cacho believes the first step in an unconventional approach would be injecting liquidity into funding markets by increasing both the size and term of open market operations. This would enable increased pass-through of rate cuts to borrowers.
If further stimulus is required, that would necessitate explicit forward guidance, and QE purchases of government and semi-government (state) bonds, in that order.
"We think the primary aim and impact of unconventional policies would lower risk free rates across the curve, reducing term funding costs for lenders and maximising the pass-through of cash rate cuts," the UBS economist said.
But some forecasters think that lowering the cash rate to 0.5, per cent coupled with additional fiscal stimulus, will provide enough policy support for the economy and render QE unnecessary.
“Two more policy rate cuts, coupled with some fiscal stimulus, should bring about a visible improvement that does not mandate quantitative easing,” said Barclays Bank economist Rahul Bajoria.
Conventional monetary policy is working but "slowly”, said Stephen Roberts, economist at Laminar Capital, who points out that gross domestic product growth appears set to lift further.
“The case for unconventional monetary policy measures is not yet justified in an Australian context,” he said.