- NAB has brought forward the timing of when it expects the RBA to cut official interest rates.
- It now sees 25 basis point cuts being delivered in June and August, not July and November as previously forecast.
- Beyond the cuts the NAB is already forecasting, it says the RBA may need to consider “an alternative policy measure to support the economy”.
- That could take the form of quantitative easing or something even more experimental.
The National Australia Bank (NAB) expects the Reserve Bank of Australia (RBA) will go hard and early when it comes to interest rate cuts, forecasting the bank will cut Australia’s cash rate by 25 basis points in both June and August.
The NAB previously forecast the RBA would move in July and November.
“Thursday’s labour force data provided further evidence that the economy is weaker than the RBA had expected,” said Alan Oster, the NAB’s Chief Economist.
“The unemployment rate has risen from an eight-year low of 4.9% in February to 5.2% in April. Although employment has remained strong, other measures point to increased spare capacity over recent months, while forward indicators of the demand for labour have turned down, except for the less timely ABS job vacancies series.
“Given low inflation, continued weakness in the NAB business survey and now higher unemployment, we think the Board will now act in June and that this is likely to be signalled in the May Board minutes and Governor Lowe’s speech on Tuesday.”
Beyond the 50 basis points of cuts already expected, taking the cash rate to 1%, Oster says there’s a growing risk that RBA may have to move beyond rate cuts in order to stimulate the economy and lift inflation back towards its target.
“We have previously noted that further policy adjustment may be required and we highlight the risk the RBA will deliver additional policy stimulus by early 2020,” Oster said.
“This could be in the form of a further rate cut, taking the cash rate below 1%, or consideration of an alternative policy measure to support the economy.”
So quantitative easing (QE), or something even more experimental, could be on the cards in Oster’s opinion.
Oster says the “case for additional stimulus stems from the RBA’s need to reduce real interest rates, an objective that is frustrated by low actual and underlying inflation”.
In a speech delivered in December last year, RBA Deputy Governor Guy Debelle said that QE was “a policy option in Australia, should it be required”.
“There are less government bonds here, which may make QE more effective. But most of the traction in terms of borrowing rates in Australia is at the short end of the curve rather than the longer end of the curve, which might reduce the effectiveness of QE,” Debelle said.
Alternatively, Debelle suggested that “the RBA’s balance sheet can also expand to help reduce upward pressure on funding”.
In a note released in late April, Citibank said that “helicopter money”, or printing money to be distributed to the public, is the “ultimate” unconventional monetary policy tool available to the RBA should traditional monetary policy easing prove to be ineffectual in stimulating economic activity.
“Unlike negative interest rate and quantitative easing policies, helicopter money can be designed to boost economic efficiency [such as lowering unemployment] whilst limiting negative spillovers to other areas like financial systems stability [such as risks associated with asset bubbles] and distributional equity [such as wealth inequality],” said Paul Brennan, Josh Williamson, Carl Ang and Steven Mansell, members of Citi’s Australian economic and interest rate strategy team.
Citi suggests there’s around “a one-third chance” that such a policy response could occur in the next three years.
Financial markets are already fully priced for the RBA to cut Australia’s cash rate to 1% by early next year, with another rate cut, taking the cash rate to just 0.75%, deemed to be a real possibility.
With little traditional monetary policy ammunition available to the RBA, at a time when inflation is already very weak and economic growth sluggish, it’s understandable why some strategists are now openly discussing the potential for RBA policy to become experimental.
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