RBA Governor Philip Lowe has poured water on the prospects of quantitative easing (QE), saying Australia “shouldn’t forget about fiscal policy” to prevent a recession.
“QE is not on the agenda at this time,” Governor Lowe told at the annual dinner of the Australian Business Economists.
Interest rates will have to hit 0.25 per cent before the RBA considers QE – something that economists are predicting by mid-2020. But Governor Lowe doesn’t think QE will be necessary, saying that the Australian economy is in a good position and that the RBA will achieve its goals.
“At the moment, though, we are expecting progress towards our goals over the next couple of years and the cash rate is still above the level at which we would consider buying government securities.”
However, Governor Lowe hinted again that he would prefer the use of fiscal policy rather than monetary policy to ward off a recession, citing a report from the Committee on the Global Financial System (CGFS), which he recently chaired.
“The report also notes that there may be better solutions than monetary policy to solving the problems of the day,” Governor Lowe said.
“It reminds us that when there are problems on the supply-side of the economy, the use of structural and fiscal policies will sometimes be the better approach. We need to remember that monetary policy cannot drive longer term growth, but that there are other arms of public policy than can sustainably promote both investment and growth.”
Governor Lowe also said that the willingness of central banks to provide liquidity could reduce the incentive for financial institutions to hold their own adequate buffers and create an “inaction bias” from prudential regulators or fiscal authorities.
“If this were the case, it could lead to an over-reliance on monetary policy,” he said.
The sentiments about quantitative easing have been echoed by fund managers. Sarah Shaw, chief investment officer at 4D infrastructure and Chris Bedingfield, principal at Quay Global Investors have urged the government to instead allocate investment in infrastructure to create jobs and boost productivity.
Ms Shaw noted the need to replace roads, bridges and other structures with better planned “forward-thinking” infrastructure is high.
“If you think about the need for infrastructure spend that I’m talking about, if you put a number on it, it’s maxed at $4 trillion by 2040 of infrastructure capacity that’s needed,” she said.
“If you think about that and you’re in an interest rate environment as low as it is today, if you’re not borrowing to invest in a much-needed infrastructure, then there’s something wrong.”
She added she looks for companies that are locking in fixed term bet to invest for future cash flows, because “now is the time to do it” with the current low cash rate.
“Why shouldn’t countries be doing that?” Ms Shaw queried.
“I’ll give you an example: China during the GFC, biggest form of quantitative easing – 35,000 kilometres of high-speed rail. That’s the sort of quantitative easing that we should be looking at here in Australia.”
VanEck has predicted there will be more rate cuts in 2020.