For many months the Reserve Bank has told us the next move in interest rates is likely to be up, albeit not for some time.
- Low unemployment, coinciding with a steady economy and falling house prices is “uncharted territory”
- Benchmark interest rate has stayed at the record-low 1.5pc since August 2016
- A rate cut would sink the Australian dollar well below US72c
But, in a speech to a business economists’ dinner on Thursday night, not only did the bank’s deputy governor say further rate cuts were possible, but also that the RBA could engage in quantitative easing (known as Q.E) — like the US Federal Reserve did to assist the recovery from the global financial crisis — if it was needed.
Guy Debelle’s comments came a day after surprisingly weak GDP figures showed a notable slowdown in Australia’s economy during the third quarter.
This data has caused many economists — a lot of whom were at the dinner Dr Debelle was addressing — to question the Reserve Bank’s economic growth forecasts and its hope to raise interest rates.
On Thursday night the RBA’s second-in-command himself threw a fair degree of doubt on Australia’s economic outlook.
“[Household] consumption was weaker than expected, everything else was pretty much as expected so I think it’s just a question of seeing how that goes,” he said.
“We’ll see how that goes over the next few months and reassess accordingly.”
The weakness in consumption is likely to be, at least in part, related to the dramatic fall in Sydney and Melbourne property prices, something Dr Debelle admitted the Reserve Bank was keeping a watchful eye on.
“It’s an interesting environment where … the unemployment rate’s been coming down, the economy’s growing at a reasonable pace — that’s not an environment we’ve really seen anywhere else before where house prices are falling,” he said, answering a question.
“It’s somewhat uncharted territory, seeing how that might play out.”
Cutting rates and sinking the dollar
If things turn out much worse than the RBA currently expects, Dr Debelle said the bank is not without tools to try and minimise any economic downturn.
“The Reserve Bank has repeatedly said that our expectation is that the next move in monetary policy is more likely up than down, though it is some way off,” he said.
“But should that turn out not to be the case, there is still scope for further reductions in the policy rate.”
If cutting interest rates does not spark any life back into housing or a slowing economy, Dr Debelle said the RBA would be prepared to take more extreme measures.
“We have also been able to examine the experience of others with other tools of monetary policy and have learned from that. Hopefully, we won’t ever have to put that learning into practice,” he told the gathered economists.
“QE is a policy option in Australia, should it be required.
Dr Debelle said a key lesson from the global financial crisis was that economies needed a steady flow of debt to flourish.
“The crisis very much demonstrated the critical importance of keeping the lending flowing,” he added.
“The lesson is that countries that did that fared better than countries that didn’t. That lesson is relevant to the situation today in Australia, where there is a risk that a reduced appetite to lend will overly curtail borrowing with consequent effects for the Australian economy.”
Any moves to cut interest rates further to fresh record lows or to implement quantitative easing would likely push the Australian dollar significantly lower, well below the US 72 cent level it is currently trading around.
Dr Debelle said this in turn would also boost the economy.
“The floating exchange rate matters and remains an important shock absorber for the Australian economy,” he said.
HSBC chief economist Paul Bloxham said, even though the deputy governor raised possible responses to worst-case scenarios, the RBA still seems confident the economy will continue to perform solidly.
“What was clear from the speech, and the questions and answers that followed, was that while the economy is performing well and the labour market remains strong, the RBA is unlikely to feel the need to cut, even with inflation below the mid-point of the target band,” he wrote.
“In addition, although the third quarter GDP print has shaken the growth story a bit recently, the deputy governor seemed quite keen to discount the numbers to a degree, pointing instead to the low unemployment rate and labour market momentum.”