The Reserve Bank of Australia says further rate cuts are on the table as ongoing lockdowns cause a grinding economic recovery.
In a speech on Tuesday morning, RBA deputy governor Guy Debelle said a future cut to the cash rate had not been ruled out, flagging the country’s emergence from the financial downturn has been “gradual and slow” rather than the economic snapback initially expected.
Dr Debelle said a move to a negative interest rate position, which has been adopted by other overseas central banks, was “extraordinarily unlikely” but the RBA was considering all its policy options. The official cash rate is 0.25 per cent, a historic low.
“Given the outlook for inflation and employment is not consistent with the bank’s objectives over the period ahead, the board continues to assess other policy options,” he said.
The country’s road map out of the lockdown has been hampered by the ongoing shutdown in Victoria, which is fuelling a two-pronged recovery for the economy.
Dr Debelle said the recovery was also be held back by a large shortfall in demand that usually occurred during a recession.
“Overall the recovery has not been a rapid bounce but a slow grind,” he said.
“Until households and businesses are confident about future demand and income, they will be reluctant to spend and invest.”
Dr Debelle said the strongest recovery had been in Western Australia, which is experiencing retail consumption at pre-COVID-19 levels.
The RBA expects the economic demise of Victoria has subtracted 2 per cent from national gross domestic product (GDP) in the September quarter.
The deputy governor’s choppy outlook also coincides with weekly payroll figures that show for the week ending September 5, payroll jobs decreased 4.5 per cent.
ANZ economist David Plank said the RBA’s monetary policy mechanisms were likely to be on hold for the remainder of 2020, but further steps seemed likely.
Dr Debelle noted the adoption of a negative interest rate position could impact consumption levels and hinder the financial system in the medium to long term.
“Negative rates can also encourage more saving as households look to preserve the value of their saving, particularly in an environment where they are already inclined to save rather than spend,” he said.
The RBA has indicated it may expand its bond buying regimen to incorporate bonds with longer yield maturities than three years.
Targeting bonds with longer maturities could assist in lowering the exchange rate of the Australian dollar if the currency is deemed to not be in line with its fundamental trading price expectations.
The central bank previously noted the currency was trading within expectations and reflecting a weaker US dollar against other major currencies and also high demand for iron ore primarily from China.
The RBA’s balance sheet during the downturn has almost doubled to $300 billion, reflected by its bond buying program and term funding facility, which is providing the financial system with cheap liquidity.
Originally published as Where Reserve Bank doesn’t want to go