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RBA Has Already Taken First Step on Path to QE, Deutsche Argues
2019-08-14 06:22:36.204 GMT

By Michael Heath
(Bloomberg) — Australia could already be on a path toward
unconventional policy, Deutsche Bank AG said, noting the Reserve
Bank’s expectation that interest rates will be low for some time
is similar to language used by the Federal Reserve and European
Central Bank before ultimately turning to QE.
In a research report surveying the RBA’s options given it
only has 1 percentage point of ammunition remaining, Deutsche
economist Phil Odonaghoe cited Governor Philip Lowe’s comments
about an “extended period” of easy policy.
“That kind of explicit forward guidance will be familiar to
anyone who has studied the Fed or the ECB over the past decade,”
he said in a research report Wednesday. “So while it might
remain ‘unlikely’ in Australia, the evidence suggests the RBA
has embarked on a path that for others at least, has ended with
entrenched unconventional policy settings.”
In a July 25 speech and in the Aug. 6 meeting statement,
Lowe made the reference and added that policy makers were
prepared to ease further in the event back-to-back cuts failed
to revive economic growth and spur increased hiring. Deutsche
forecasts the RBA will cut to 0.25% by year’s end as the U.S.-
China economic confrontation intensifies and the threat of a
worldwide recession rises, prompting a ‘race to zero’ on global
bond yields.
It takes three lessons from the U.S. and European
experiences:
* QE can be effective. But Australia faces two problems: a
comparatively limited supply of government bonds, and mortgage
rates linked to short-end, not long-end rates
* Four European central banks have adopted negative policy rates
since 2014 and the lesson is that negative rates can be
problematic, especially for a concentrated banking sector like
Australia’s
* The U.S. and Europe experiences suggest explicit forward
guidance, like the RBA’s “extended period” language, ultimately
becomes a gateway to other unconventional policy measures

As to what unconventional policy Down Under would look
like, Odonaghoe offers the following:
* The RBA’s first unconventional step will be to adopt even more
explicit calendar guidance, saying the cash rate is expected to
remain unchanged “until at least some fixed and specified point
in the future”
* Beyond that, the best alternative is for the baton to be
passed to a “materially easier fiscal stance,” before more
aggressive unconventional options are considered
* In the worst case scenario, international evidence coupled
with Australian circumstances suggest one course of action may
be QE coupled with fiscal stimulus

“The limited supply of government bonds might mean QE would
require increased issuance, of either ACGBs (Australian
Commonwealth Government Bonds) or even semis (state government)
directly, with that additional issuance primarily absorbed by
the RBA,” he said. “That issuance could then fund a variety of
infrastructure or household cash flow stimulus measures. To be
sure, we remain some way from this scenario.”

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
Edward Johnson