SYDNEY (Reuters) - Zero interest rates and quantitative easing are unlikely to be needed in Australia but it was prudent to study other central banks’ use of such unconventional policies in case they had to be implemented, the Reserve Bank of Australia said on Friday.
Appearing before a parliamentary committee, RBA Governor Philip Lowe stressed the central bank’s base case was for the economy to improve and that it may now be at a “gentle turning point” with growth expected to pick up next year.
But with the U.S.-China trade war intensifying and the RBA cutting rates in June and July to a record low of 1%, lawmakers pressed Lowe on other scenarios.
“It’s possible we end up at the zero lower bound. I think it’s unlikely but it is possible. We are prepared to do unconventional things if circumstances warranted. I hope we can avoid that,” he said.
In his most explicit and detailed comments on the central bank’s extreme policy options, Lowe outlined two scenarios in which the RBA might cut to zero.
The first was if central banks around the world slashed rates to zero, and he noted that markets currently expect rate cuts in the next six months from all major central banks. The second situation was if the domestic economy deteriorated sharply.
“I hope this doesn’t happen, I hope all central banks don’t end up going down towards zero. It is a possibility, I think it is a small possibility, but it is possible and it is prudent for us to think about what we would do in that case,” he said.
“I think the other scenario would be if growth in the Australian economy fell considerably short of our central scenario,” he said, saying all monetary, fiscal and structural policy options would then need to be considered.
If the RBA was to adopt quantitative easing, Lowe said it would most likely involve buying government securities and focused on reducing the risk-free rate along the yield curve.
“In principle, we could do that at any level of interest rates. I think it’s reasonable to expect that we wouldn’t do it at the current level of interest rate or even a bit below the current level of interest rate,” he said.
“So we would need to be very close to zero to do that.”
Quantitative easing is where central banks add money to the banking system to keep rates low out to longer maturities as a way of promoting lending. They do this by purchasing assets from banks, which could include government bonds and securitized loans.
Since the global financial crisis, the U.S. Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan have all used forms of quantitative easing.
Reporting by Swati Pandey and John Mair; Editing by Sam Holmes