RBA Lowe: Negative Policy Rate Still Extraordinarily Unlikely
- Published on
- 03 Nov 2020, 06:55 PM
RBA Lowe: No Change in View Little To Be Gained from Negative Policy Rate
RBA Lowe: Negative Policy Rate Extraordinarily Unlikely
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(Updated with comments from Q&A)
By Sophia Rodrigues
The Reserve Bank of Australia has done as much as is sensible in terms of interest rates and continues to view a negative policy rate as extraordinarily unlikely, Governor Philip Lowe said Tuesday.
Lowe made the remarks at the press conference following the announcement of a suite of decisions at the end of the November 3 board meeting.
At the meeting, the RBA lowered the cash rate target to 0.1% and cut the interest rate on Exchange Settlement balances to zero. It also launched Quantitative Easing and other rate changes.
“In terms of interest rates, I think we have gone as far as it makes sense to do so in the current environment,” Lowe said. He added that there is little to be gained from lowering the policy rate into negative territory.
“While a negative rate might lead to a helpful depreciation of the Australian dollar, it could impair the supply of credit to the economy and lead some people to save more, rather than spend more. Given this assessment, the Board continues to view a negative policy rate in Australia as extraordinarily unlikely,” he said.
Despite this, the RBA still holds firepower to provide more easing to the economy, and is prepared to use them if the circumstances require.
This would be in form of more bond-buying because quantities matter in a world where monetary policy is about more than just short-term interest rates, Lowe said.
“In this world, it is certainly possible for us to increase the size of our bond purchases. Given this, we will continue to closely monitor the economic situation and the impact of our purchases on market functioning. If we need to do more, we can and we will,” Lowe said.
Lowe said the RBA’s announcement to conducted bond-buying means it is now doing QE similar to that of many other central banks.
The decision to do QE and effect other rate changes is to ward off the threat to the economy and to balance sheets from an extended period of high unemployment.
At the Q&A session, Lowe said the RBA will refrain from buying bonds that were issued or reissued in the week past to avoid any perception that it is directly financing the government borrowing.
The RBA doesn’t have any hard rule around one week lag and is prepared to revise it based on market conditions.
Lowe also said the RBA is not targeting a particular yield level for 10-year bonds but added it has the scope to do more bond-buying if required.
He noted that the Australian 10-year bond yield is below US but higher than Canada, and it would be helpful if it comes down a little further.
The RBA could do more if required given after the A$100 billion purchase it would own about 15% of bonds on issue. By comparison, the Federal Reserve owns about 20%, ECB about 30% and RBNZ around 40%.
--Contact: Sophia@centralbankintel.com