RBA Lowe: AUD Would Be Higher If Australia’s Interest Rate Higher Than Others
- Published on
- 16 Nov 2020, 08:59 PM
By Sophia Rodrigues
(Updated with comments from Q&A)
--AUD Would Be Higher If Australia’s Interest Rate Higher Than Others
--MonPol Now Also About Quantity Of Money, So RBA Doing QE
--QE Impacts Long-Term Risk-Free Rates, Portfolio Adjustments, AUD
--Our Policy Rate Essentially Zero As In Many Other Countries
--Will Consider Negative Rate If All World's Cenbks Go Negative
--Board Wants To Do What It Can To Reduce Unemployment--Recent Economic Data Better Than Expected
--Could Have Rapid Rebound If Further Good News On Health Front
--Also Still Possible We Experience Further Outbreaks
--Extended Period Of Higher Unemployment Highly Probably
--Low Interest Rate Could Change Investor Housing Demand, To Watch Carefully
--Important To Guard Against Become Too Risk-Averse
--Watching How People Adjust Portfolio To Search For Yield
--Job Creation Bigger Challenge Next Few Yrs Than Controlling Inflation
--Not Backing Away From Inflation Target; Remain Committed to 2%-3%
The Reserve Bank of Australia expects its Quantitative Easing Program and near-zero policy rate to lower long-term risk-free interest rates and the exchange rate through impact on the price of other assets and international capital flows.
The RBA is still learning about how strong and durable these transmission mechanisms are and will learn more over coming months, Governor Philip Lowe said Monday in a speech at the CEDA Annual Dinner in Sydney.
At the Q&A session later, Lowe maintained negative rate is still extraordinarily unlikely in Australia because the costs still outweigh its benefit. According to Lowe, the only upside is the downward pressure it would put on the exchange rate.
The RBA would rethink this only if all the world’s major central banks decided to set interest rates in negative territory.
“If for the sake of argument, the Federal Reserve was minus 50 basis points or (minus) one percentage point and we sat there with higher interest rates and we are still in the world we are now, the Australian dollar would be incredibly attractive, capital would be flowing in and currency would go up, and it would be harder to create jobs,” Lowe said
In the speech, Lowe talked about the RBA’s forward guidance which now focuses on actual inflation and its increased focus on jobs but emphasised that it doesn’t mean the RBA is backing away from inflation target.
“As Australia’s central bank, we will continue to provide a strong nominal anchor through the 2 to 3 per cent medium-term flexible inflation target. We remain committed to achieving this target,” Lowe said.
The RBA aims to achieve the target by reducing spare capacity in the economy which would happen when more people get back into jobs.
On a question on the possibility of inflation rising quickly and becoming a problem, Lowe said it is incredibly unlikely because it would require wages growth of 3.5% to 4.0%, and the RBA’s forecast is for wages growth starting with a one.
Lowe said the RBA’s policy rate is now “essentially zero” like in many other countries, and it’s because it couldn’t ignore the global trend towards low rates.
“If we had sought to ignore this gravitational pull, there would have been obvious implications for our exchange rate and our economy. If our interest rates were higher than in the major countries there would be stronger inflows into Australian dollar assets and this would put upward pressure on our exchange rate,” he said.
On the economy, Lowe said the recent economic data has been better than expected, and while there could be rapid rebound if there were further good news on the health front, there was also possibility of more virus outbreaks.
In any case, Lowe said it does seem “highly probably that one of the marks the pandemic will leave is an extended period of higher unemployment than we have become used to.”
The pandemic will also lead to sharp decline in population growth, affect the property market, make people risk-averse and lead to more digitalization of the economy.
Lowe said property market presents a complex picture but the most obvious impact has been on retail properties and office spaces in the CBD.
One area the RBA is “watching carefully” is investor demand for housing which has been subdued so far but it is possible that low interest rates will change this.
Lowe said people might become less inclined to lever up and be cautious in taking on debt but it is also important to guard against become too risk averse.
“If businesses are to seize the opportunities that are out there to grow and to increase Australia’s productive capital base, some degree of risktaking is necessary,” Lowe said.
--Contact: Sophia@centralbankintel.com