The one-two punch of coronavirus and the bushfire crisis means the RBA shouldn’t rule out the use of quantitative easing, AMP chief economist Shane Oliver has said.
RBA governor Philip Lowe has sought to pour cold water on the possibility of quantitative easing, saying that it’s “not on the agenda at this time” and that the RBA was expecting “progress towards (its) goals over the next couple of years” while setting the threshold for its use at 0.25 basis points.
But given that the coronavirus and bushfire crisis – and the RBA’s lack of progress towards its goals – are making another rate cut by June increasingly likely, we might soon be at the point where the RBA needs to reconsider their agenda.
“Either the RBA relaxes it goals, which will weaken their credibility, the government will have to provide more fiscal stimulus, which would be the optimal outcome but is not assured at present, or the RBA will have to undertake more monetary easing,” AMP chief economist Shane Oliver said.
“The latter would entail taking the cash rate to the RBA’s suggested floor of 0.25 per cent and then doing quantitative easing. So, we continue to see further rate cuts in the months ahead with a high chance that quantitative easing will be required, despite governor Lowe saying that “it is not on our agenda at the moment”.”
Governor Lowe has indicated that any QE program would likely involve the purchase of government bonds but noted that any such action by the RBA could create an “inaction bias” and “an overreliance on monetary policy” by fiscal authorities.
Governor Lowe has also called for more fiscal stimulus to help improve the economy.
“There may be better solutions than monetary policy to solving the problems of the day,” Governor Lowe told the annual dinner of the Australian Business Economists in November.
“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 that can sustainably promote both investment and growth.”
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