Powered by MOMENTUM MEDIA

Why is the RBA spending our recession insurance?

Lachlan Maddock
— 1 minute read

It’s an important question to consider when the official cash rate is 75 basis points and falling.

In September, the RBA cut rates to 0.75 per cent – the lowest that interest rates have ever been – citing low household growth and the burgeoning US-China trade war. 

While these cuts are intended to ward off a recession, they leave the Australian economy with little room to move should there actually be one. 

Advertisement
Advertisement

So why are we spending our recession insurance? 

“Given the slowdown in growth that we started to see last year coming into this year I think that [the Reserve Bank] [is] worried that if they don’t do anything things will get a lot worse,” AMP Capital chief economist Shane Oliver told Investor Daily. 

“Waiting for a recession to impact can often mean leaving it too late.”

While the potential beneficial impacts of interest rate cuts are yet to be felt, they have caused the largest drop in consumer confidence in the last four years. And with the trade war biting into China’s growth and global metal market softening, it is unlikely that Australia won’t be impacted by a global economic slowdown. 

If that happens, further interest rate cuts will only do so much.

“We are getting to the point where monetary policy has done as much as it can and you need help from other arms of economic policy, such as fiscal stimulus and structural reform in the economy,” Mr Oliver said.

While the conversation is moving more and more towards quantitative easing (QE) as the next policy that the RBA could pursue, it remains uncertain whether QE could be as effective in Australia as it was in America. 

“In Australia we mostly borrow from the front end rather than the long end of the curve, and that does mean the effectiveness is less,” ANZ senior economist Felicity Emmett told Investor Daily.

While there would be some benefit to the economy, it would not be the fix-all solution that some commentators expect.   

Under QE, people won’t necessarily borrow more and banks won’t necessarily lend out the money they get. The benefits of QE are also felt more in the top end of town; it pushes up share markets, which is good for people with large investment portfolios but not so good for low income earners. 

QE would have to be deployed alongside a number of fiscal stimulus policies in order to have a substantive effect in a recession. 

Some of these policies could include bringing forward the 2022 low- and middle-income tax offsets and instituting accelerated asset depreciation for some business expenses. 

Infrastructure spending and development using resources freed up by the housing construction downturn could also help stimulate the economy in the event of recession. 

With a global recession growing more likely every day, it remains to be seen whether interest rate cuts will be enough to turn things around. 

“Obviously if the economy did really start to weaken quite seriously then it would be appropriate for the government to step in and the government is in a very good position to do that,” said Ms Emmett. 

“The budget is practically in surplus, we have low public debt, so there would be lots of options for the government to step in to support the economy.”

 

Why is the RBA spending our recession insurance?
investordaily image
ID logo

related articles

promoted stories

Website Notifications

Get notifications in real-time for staying up to date with content that matters to you.