The Reserve Bank of Australia was able to bring down the cash rate by 0.755%. What other actions will it take to reach its economic objectives, if any?
RBA Governor Philip Lowe’s statements in the recently published report by BIS Committee on Global Financial System appear to be an indication that the central bank is open to doing what is necessary to boost the Australian economy, hinting at employing “unorthodox methods”.
“The Great Financial Crisis and its aftermath presented central banks with unprecedented challenges. Policymakers responded with new tools. He stated that “central banks implemented different combinations of monetary policies tools (UMPTs)” and was referring to two unique tools still to be used in Australia: negative rates (QE), and quantitative easing (QE).
Lowe, the chairman of the BIS Committee, said that UMPTs were a tremendous help to central banks when it comes to addressing the crisis and economic downturn.
He expressed his hope that the report would be useful to policymakers, who will use the lessons from the past to improve future monetary policy effectiveness.
Lowe stated that, while his statements indicate that Lowe is open for such measures to be adopted in Australia and that he was willing to do so, he pointed out one crucial requirement before they are implemented.
Business Insider Australia heard from him that the tools are most effective when used in conjunction to a wider range policies such as prudential and fiscal.
QE to increase house prices
QE, in its simplest form is the printing money. The central bank would use the money to purchase safe assets such as government bonds and mortgage-backed securities.
Jason Aravanis from IBISWorld is senior industry analyst. He said that this method could have limited effectiveness due to high money supply.
QE could also affect interest rates for assets denominated locally. This could reduce the attractiveness of Australian debt assets.
RBA could increase export competitiveness, and infuse the market by devaluing currencies. This would also make imported goods more expensive. Aravanis stated that this strategy is effective because other central banks have not tried to devalue their currencies.
Negative rates endanger banks
Jack Derwin, market watcher, stated that negative rates could lead to chaos in the financial markets.
Negative interest rates are when money that is deposited with banks may be charged interest rather than being earned. He stated that it was even more shocking that banks could pay individuals to borrow money.
Market watchers claim that negative rates do not have any tangible benefits.
Aravanis said that a negative interest rate policy would pose a serious threat to the banking sector.
Banks can’t charge interest on deposits because retail depositors are more likely than banks to withdraw their money completely in order to protect their wealth. He said that Australia’s top four banks are at risk of losing their profitability due to negative interest rates. They boast some of the highest margins in developed nations.