RBA deputy governor Guy Debelle has flagged the possibility of rate adjustments and outlined the bank’s unconventional policy toolkit as it prepares for a “slow grind” recovery.
Mr Debelle said the RBA could consider lowering “the current structure of rates in the economy a little more” but warned that negative rates were not on the agenda.
“The empirical evidence on negative rates is mixed,” Mr Debelle said.
“In the short-term, they can contribute to a lower exchange rate. In the medium-term, the effectiveness can wane including through the effect on the financial system. 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.”
Mr Debelle also said that the RBA could consider buying bonds further out along the curve, supplementing its three-year yield target, and named foreign exchange intervention as another potential policy option, while warning that the Australian dollar was “broadly aligned” with fundamentals and that any intervention might not be effective.
“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,” Mr Debelle said.
But Mr Debelle refused to be drawn on when the RBA could use these measures, saying they would continue to monitor the recovery but would take into account support announced in the October budget. Mr Debelle also said that Australia’s debt burden as a result of COVID-19 remained serviceable and that it could have been much higher if the government hadn’t launched its stimulus programs.
“The fact that household income rose in the quarter does not mean that the stimulus was overdone,” Mr Debelle said.
“Absent the stimulus, the decline in GDP and employment would have been significantly larger and there would have been much greater financial hardship…The transfer from the strong balance sheet of the government to bolster the balance sheet of the household sector is an entirely appropriate and timely policy response.”