The Reserve Bank is open to “lowering the current structure of rates in the economy a little more, without going into negative territory,” Guy Debelle, the RBA deputy governor, said yesterday.
The remuneration on exchange settlement balances is currently 10 basis points, the three-year yield target is at 25 bps and the borrowing rate of the Term Funding Facility is also 25 bps.
“It is possible to further reduce these interest rates,” Debelle said in a talk to a virtual conference hosted by the Australian Industry Group.
“Given the outlook for inflation and employment is not consistent with the RBA's objectives over the period ahead, the RBA board continues to assess other policy options,” he said.
“One option considered is to buy bonds further out along the curve, supplementing the three-year yield target. Purchases would still be conducted to maintain the target for the three-year bond, but additional purchases could occur further out the curve on a regular basis.
“This would have the effect of further lowering government bond rates at longer maturities. Very few financial instruments in Australia price offer these yields. This is in contrast to the US where the 10-year Treasury yield is a key pricing benchmark for mortgage rates.
“The board has focussed on the three-year yield as the target, because Australian financial instruments price predominantly off the shorter end of the curve. These institutional differences across countries are important and affect the design and transmission of monetary policy actions,” Debelle said.
The current level of government bond rates “is not a constraint on the fiscal decisions of the Australian and state governments,” he said.
“They all have strong balance sheets, with debt stocks that are low relative to other jurisdictions, even taking account of the current sizeable fiscal stimulus. The increase in debt is definitely manageable.
“Moreover, there is not, in my judgement, a trade-off between debt and supporting the Australian economy in the current circumstance. Absent the fiscal stimulus, the economy would be significantly weaker and debt levels even higher.
“This is particularly so with interest rates at their historically low levels, where the growth benefit from the fiscal stimulus will improve the debt dynamics and help service the debt in the future.”
Debelle also pointed to foreign exchange intervention as “another potential policy option.
“However, with the Australian dollar broadly aligned with its fundamentals, it is not clear this would be effective in the current circumstances.”
A fourth option, he said, “is negative rates …. The empirical evidence on negative rates is mixed.
“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. That is, the income effect can be larger than the substitution effect.”
Appearing to rule out this form of QE, at least for now, Debelle pointed out that, “to date, those economies with negative policy rates have not lowered them further. Instead, they have eased monetary policy settings through other means.”