| 14.09,19. 12:57 PM |
Reserve Bank may slash rates to 0.25 per cent, but 'reluctant' to dip into negative territory
Photo: Despite a slowing economy, budget coffers are filling faster than expected. (AAP: Darren England)
banks around the world, including Australia's Reserve Bank, are under
increasing pressure to cut interest rates to stimulate their economies.
comes as the European Central Bank cut its benchmark deposit rate
further into negative territory (-0.5 per cent from -0.4 per cent), and
reintroduced a bigger-than-expected stimulus package — pledging to buy
20 billion euros ($32 billion) worth of bonds every month, indefinitely.
than 30 countries have lowered their benchmark borrowing rates this
year amid rising concerns about slowing growth, recessions, trade wars
and a potentially chaotic Brexit.
The last time so many
policymakers cut rates or introduced stimulus at the same time was
during the global financial crisis, a decade ago.
place "additional pressure on the Reserve Bank to cut rates further
given an appreciating exchange rate would undo some of the benefit of
lower interest rates locally," NAB chief economist Alan Oster wrote in a
Australia's cash rate is currently sitting at a
record low 1 per cent, following two back-to-back rate cuts in the last
However, the RBA may need to do a lot more heavy
lifting and cut rates to a new low of 0.25 per cent by the middle of
next year, according to the revised (and more downbeat) forecasts from
both ANZ and National Australia Bank in the past week.
biggest winners from these low rates will be those taking out a mortgage
to buy a home, while the most disadvantaged will be Australians who
rely on their bank savings to earn interest.
Both major banks already expected Australia's central bank to cut rates to 0.75 per cent in November.
the next cut might happen as soon as October "if there was further
weakness in the labour market revealed next week", Mr Oster added.
Thursday, the Bureau of Statistics will unveil its eagerly-awaited
unemployment figures and if it rises sharply above its current 5.2 per
cent level the RBA will be concerned.
The Reserve Bank has
been particularly vocal about wanting to see the jobless rate fall to
4.5 per cent to boost wage growth, consumer spending, inflation and
(eventually) GDP growth — all of which are at or near decade lows.
growth continues to undershoot the Reserve Bank's forecasts, such that
unemployment is likely to edge higher, with inflation stuck below the
2-3 per cent target band," Mr Oster said.
Because of that,
he now predicts the RBA will implement a further cut (down to 0.5pc) in
February and "unconventional policy" (quantitative easing, in other
Philip Lowe told Parliament, in early August, that all options were on
the table if the domestic economy worsens, including cutting rates to
zero or even negative levels.
"It's possible we end up at the zero [rate] lower bound. I think it's unlikely but it is possible," he said at the time.
"We're prepared to do unconventional things if the circumstances warranted it."
NAB believes this may involve buying government bonds or "long-dated purchase agreements to lower bank funding costs".
think the RBA will be extremely reluctant to consider a negative cash
rate," said ANZ's head of Australian economics, David Plank.
Like his fellow economists at NAB, he agrees, "The rate cuts could come sooner if the [weaker] domestic data warrants."
the last few months, RBA governor Philip Lowe has pleaded for the
Morrison Government to borrow more money — at record low rates — to pay
for fiscal stimulus measures.
These measures might include
new infrastructure investment, cash hand-outs or even bringing forward
the $158 billion income tax cuts — which are set to be introduced in
three stages until 2024-25.
"Unless the Government delivers a
meaningful fiscal stimulus, a further cut to 0.25 per cent by mid-2020
is likely, along with the adoption of non-conventional monetary policy
measures," Mr Oster said.
However, Dr Lowe's pleas for extra
spending appear to have fallen on deaf ears, particularly due to the
strong desire on both sides of politics to bring the budget back into
surplus, with the Government pointing to its tax cuts and current
infrastructure spending plans as providing enough stimulus.
Global round of rate cuts
the RBA meets again next month, several central banks around the world
will have cut their rates even further — or signalled an intention to
introduce economic stimulus.
The Bank of Japan will make its
decision on Thursday (AEST), with Commonwealth Bank senior economist
Belinda Allen expecting the BoJ to "leave monetary policy unchanged
[but] the risks are growing for further policy easing".
the United States will almost certainly receive a 25-basis-point rate
cut from its Federal Reserve (Fed) on Thursday morning (AEST) — an
attempt to protect the US economy from slowing growth, partly due to Mr
Trump's protracted trade war with China.
Markets have priced in a 94 per cent likelihood of a US rate cut next week.
will not be enough to satisfy US President Donald Trump, who has been
urging the Fed "boneheads" to aggressively cut rates into negative
However, Mr Trump's tweets, posted after the ECB
decision, suggest he is even more incensed by the independent Fed's
refusal to bend to his will.
"They are trying, and
succeeding, in depreciating the Euro against the VERY strong Dollar,
hurting US exports.... And the Fed sits, and sits, and sits," he
"They get paid to borrow money, while we are paying interest!"
Negative rates are usually a last resort, used reluctantly by central banks to battle weak economic growth.
US President also did not address the risks or financial market
tensions that central banks in Europe and Japan have confronted as a
result of their negative rate policies — or the larger issue that
negative rates have not yet secured higher growth or higher inflation
for those economies.