MNI POLICY: Still 50Bps Leeway Before Considering QE: RBA Lowe

By Lachlan Colquhoun

     SYDNEY (MNI) - The Reserve Bank of Australia would consider buying

government bonds if official rates were lowered to 0.25%, although such a move

isn't currently on the agenda, RBA Governor Philip Lowe said Tuesday.

     Speaking on "Unconventional Monetary Policy: Some lessons from overseas",

Lowe told an audience in Sydney that of all the unconventional measures

available he believed that quantitative easing, in the form of purchasing

government bonds in the secondary market, was the preferred policy for

Australia.

     QE would not become an option until rates are at 0.25%, Lowe said, as at

that level the interest rate paid on surplus balances at the RBA "would already

be at zero given" given the corridor system the bank operates.

     He ruled out purchases of private sector assets as a "significant

intervention" into private markets, and said that negative interest rates in

Australia were "extraordinarily unlikely" because it was not clear that they had

been a success when used by other central banks.

     "If - and it is important to emphasise the word if - the Reserve Bank were

to undertake a program of quantitative easing, we would purchase government

bonds," said Lowe.

     "An important advantage in buying government bonds over other assets is

that the risk-free interest rate affects all asset prices and interest rates in

the economy, so it gets into all the corners of the financial system, unlike

interventions in just one specific private asset market."

     --THRESHOLD

     Lowe said the "threshold" for QE in Australia had not yet been reached and

he didn't "expect it to be reached in the near future." Conventional monetary

policy was still working well and was being transmitted through to the exchange

rate, asset prices and a boost to household income.

     There was no "smooth continuum" from interest rate reductions to QE,

although there were circumstances "where QE could help", although experience

suggested QE put additional downward pressure on both interest rates and the

exchange rate.

     Lowe said QE would only be considered if there was evidence that the

economy was moving away from RBA goals around inflation and full employment, and

that "in the medium term" these goals were unlikely to be achieved.

     He said the RBA was still expecting progress towards its goals "over the

next couple of years" and the cash rate was still above the level at which QE

would be implemented.

     "So QE is not on our agenda at this point in time," Lowe said.

     The RBA meets next week, but expectations are that any further reduction in

rates from the current record low 0.75% will not be until February 2020 at the

earliest.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI Sydney Bureau; +61 405322399; email: lachlan.colquhoun.ext@marketnews.com

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