MNI INSIGHT: Zero Rates More Likely For RBA Than QE

By Lachlan Colquhoun

     SYDNEY (MNI) - The Reserve Bank of Australia would prefer to cut rates to

zero rather than launch quantitative easing if the economy deteriorates further,

particularly if cuts are backed up by fiscal stimulus, MNI understands.

     Commentators have called on the RBA to implement QE, perhaps as early as

this year, but MNI understands that this is not a course the Bank would like to

take.

     Having observed other central banks enacting QE over the last decade, the

RBA would favour more conventional policy levers, even if that means taking

rates to zero. RBA officials have also examined cases in which rates have fallen

into negative territory, MNI understands.

     The RBA cut to a record low 1.25% on June 4 and looks set to follow with

another reduction at either the July or August meeting. Earlier Thursday, RBA

Governor Philip Lowe said it wasn't 'unrealistic' to expect a further cut.

     Precedent would suggest the next move will take the official Cash Rate to

1.0%, with many in financial markets expecting it to fall to 0.75% by year end.

     The RBA's rule of thumb suggests a 25bps cut in rates will deliver stimulus

of just under 0.2 percentage point to GDP growth over two years, and, given

current trends, 50 bps in reductions may not meet needs.

     --SUFFICIENT AMMUNITION

     Yet the Bank believes that, even at 1.25%, it has sufficient ammunition to

stimulate the economy using rates, particularly if the Government can deliver

some fiscal stimulus.

     RBA Governor Philip Lowe has returned to this theme on several occasions

recently and MNI understands it is a view held strongly at the Bank: that

infrastructure programs and structural reform to promote growth and particularly

wages growth are needed to compliment monetary policy measures in the current

economic context.

     The recently-returned Morrison Government has a mandate for tax cuts and

some micro-economic reform.

     Australia's labour market and GDP growth have slowed and growing global

headwinds, particularly from the decelerating Chinese economy, will continue to

weigh in coming months. The RBA is concerned further slowing will hit exports,

with knock-on effects for household spending and the property market.

     The Bank is convinced lower rates will eventually filter through into

consumer spending, boosting the employment, inflation and growth, and not result

in another wave of rising household debt.

     GDP growth for the March quarter was 0.4%, delivering annualized growth of

1.8% - down from 2.3% for the year to the end of December 2018.

     The labour market is also moving in the wrong direction, with the

unemployment rate moving up from 4.9% to 5.2% and underemployment now at 8.6%.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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