“I worry that monetary policy generally has lost its potency,” acting NAB CEO Philip Chronican told the standing committee on economics last Friday. It’s certainly not a controversial point. The last year of successive rate cuts – which have done little but jack up house prices – have seen many begin to question their use, and that was part of the reason that the RBA decided to hold in November.
But unemployment spiked in October, and that’s pushed the chances of a December rate cut from 14 per cent to 28 per cent (Bloomberg WIRP). The chances of a February rate cut is now above 50 per cent.
Any new interest rate cut will push those cuts to the limits of their efficacy and heighten the chances the RBA will turn to unconventional monetary policy. But is that really a good idea?
Quantitative easing
Next week, RBA Governor Philip Lowe will give a speech entitled “Unconventional Monetary Policy: Some Lessons from Overseas”. Of course, the speech doesn’t necessarily imply anything about RBA policy going forward (get out your crystal balls) but it does suggest that Governor Lowe is thinking about what shape future policy could take. The RBA has been hinting at the possibility of unconventional policy for some time, and seems much more open to it compared to this time last year.
Unconventional policies include negative interest rates (something which Governor Lowe has previously called “extraordinarily unlikely”) and forward guidance, which would simply see the RBA provide a more specific timeframe for how long they expect low rates to be in place. Then there’s QE – widely considered to be the most likely form of unconventional monetary policy to be deployed in Australia. But QE comes with a range of considerations, including the possibility of runaway inflation and the fact that its benefits tend to be felt in the top end of town.
“It probably helps people who have shares and property more than it does people who have bank deposits,” AMP chief economist Shane Oliver told Investor Daily.
There is also the question of whether QE would work as well in Australia as it did in the US.
“We all understand what QE means in terms of theory, but obviously the environment in Australia is very different from the environment in Europe and the US, where there are large quantities of government debt on issue, which we don’t have in Australia,” Shayne Elliott, CEO of ANZ, told the standing committee on economics last Friday.
A third way?
A wide number of fiscal alternatives could negate some of the effects of a softening economy while avoiding the dangers of QE. That could include accelerated depreciation for business purchases and more tax cuts for low-income earners. Increasing Newstart payments might also stimulate the economy, according to Mr Oliver.
Governor Lowe has previously called for fiscal stimulus, encouraging the government to build infrastructure that can handle the country’s growing population. However, that would require spending some of the budget surplus – which seems unlikely, given its mere existence is one of the Liberal Party’s key policies. Treasurer Josh Frydenberg has rejected calls for the government to crack open the piggy bank, saying the surplus is there as a buffer in case of economic downturn.
Whatever the case, Governor Lowe’s speech on November 26 will be closely watched, and the country may soon find itself in a completely new monetary policy paradigm.
