RBA Says QE Is Option at 0.25%, Doesn’t Expect to Need It

(Bloomberg) --

Australian central bank chief Philip Lowe laid out his cards for unconventional policy: A government bond-buying program is an option at a 0.25% cash rate, but the threshold for such stimulus hasn't been reached and is unlikely to be in the near term.

“In my view, there is not a smooth continuum running from interest-rate reductions to quantitative easing,” Lowe, who has lowered the benchmark rate three times since June to 0.75%, said Tuesday evening in the text of a speech in Sydney. “It is a bigger step to engage in money-financed asset purchases by the central bank than it is to cut interest rates.”

The governor's highly anticipated address came as speculation mounts that the Reserve Bank will be forced to turn to unorthodox measures as it struggles to push down unemployment enough to revive inflation. This view has been reinforced by government resistance to deploying fiscal measures to support the economy as conventional rate ammunition runs low.

In his speech to Australian business economists, Lowe set out the conditions under which QE could be deployed. It would be considered if there were “an accumulation of evidence that, over the medium term, we were unlikely to achieve our objectives” under current circumstances, he said.

“In particular, if we were moving away from, rather than towards, our goals for both full employment and inflation, the purchase of government securities would be on the agenda of the board,” he said. “In this world, I would hope other public policy options were also on the country's agenda,” he added, a thinly veiled reference to fiscal measures.

The Australian dollar rose for the first time in five days after Lowe's comments, gaining as much as 0.2% to 67.95 U.S. cents.

In his speech, the governor distilled an international report he'd overseen that reviewed the experience of unconventional policy tools. He then looked at how these might apply to Australian financial markets and the economy.

His observations included:

• negative rates are “extraordinarily unlikely” in Australia
• there was no appetite at the RBA for outright purchases of private-sector assets in a QE program
• “a package of measures” works best with unconventional policy, and clear communication “enhances credibility”

Lowe said “that if -- and it is important to emphasize the word if -- the RBA were to undertake a program of quantitative easing,” it would buy government bonds in the secondary market.

An important advantage of this “is that the risk-free interest rate affects all asset prices and interest rates in the economy,” Lowe said. “So it gets into all the corners of the financial system, unlike interventions in just one specific private asset market.”

It would also have “a signaling effect,” with the bond purchases “reinforcing the credibility” of the RBA's commitment to keep the cash rate low for an extended period.

Insulated Economy

Australia was among the few developed nations that avoided the financial meltdown in 2008 and global recession the following year. A combination of rapid fiscal and monetary response and China's stimulus program helped insulate the economy. Now the RBA has returned to the community of developed market central banks as it considers bond purchases.

“Our current thinking is that QE becomes an option to be considered at a cash rate of 0.25%, but not before that,” Lowe said. At 0.25%, the interest rate paid on surplus balances at the RBA would already be at zero given the corridor system the central bank operates, he said.

Still, for all his discussion and dissection of unconventional policy -- and speculation from Citigroup Inc. and JPMorgan Chase & Co. that the central bank would move to QE next year -- Lowe sought to pour cold water on the notion.

“The threshold for undertaking QE in Australia has not been reached, and I don't expect it to be reached in the near future,” he said.

The RBA is forecasting growth to accelerate to 3% in 2021, helping push down unemployment and lift inflation. Lowe said this scenario suggests the economy is moving in the right direction, albeit gradually.

Lowe said the RBA board recognizes the limitations of monetary policy and is keeping the medium-term perspective focused on maximizing Australians' economic welfare, the third leg of its mandate.

“There may come a point where QE could help promote our collective welfare, but we are not at that point and I don't expect us to get there,” the governor said.

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, ;Malcolm Scott at mscott23@bloomberg.net, Michael S. Arnold

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