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Australia central bank open to unconventional policy if rates cut to 0.5%

Sydney

AUSTRALIA'S central bank would consider unconventional monetary options if the cash rate was cut to 0.5 per cent, deputy governor Guy Debelle said on Tuesday, though he hoped that such heavy policy adjustments would not be needed.

The Reserve Bank of Australia (RBA) has chopped rates twice since June to a record low of one per cent to help revive economic growth and inflation. Financial markets are pricing in another cut later this year and a follow-on move to 0.5 per cent in February.

The RBA has remained tight-lipped about the timing of its next move, saying only that it would consider further easing if needed.

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Most economists believe the floor for Australian cash rate to be 0.5 per cent after RBA governor Philip Lowe earlier this month signalled that there was scope to lower the cash rate "a couple" more times before thinking about a less conventional monetary stimulus.

His deputy, Mr Debelle, reiterated that view in Canberra on Tuesday. "If we are not achieving our objectives, then we have a mandate to try and achieve our objectives," Mr Debelle said when asked what the policy response would be when rates went down to 0.5 per cent.

When asked if the bank would consider buying government and corporate debt as the cash rate moved closer to zero, Mr Debelle said: "Those are some of the options we have thought about, yes."

The RBA has looked into the experience of other major economies with negative interest rates and other unconventional policies, minutes from its August meeting noted.

Its research found that unconventional policy worked best when it took the form of a package of measures and was accompanied by clear and consistent policy messaging. That suggests Australia might adopt a similar approach if such stimulus was needed.

Australia's A$1.9 trillion (S$1.78 trillion) economy came out of the global financial crisis relatively unscathed and has not had a recession since the early 1990s but it seems to be running out of steam now.

Earlier this month, the RBA downgraded forecasts for economic growth, inflation and employment even as it assumed the cash rate at 0.5 per cent.

Mr Debelle noted that a depreciating Australian dollar was supporting the economy, saying that further falls would be beneficial.

The Aussie has fallen more than 4 per cent so far this year to as low as US$0.6677, a level not seen since early 2009.

"The depreciation of the currency has been helpful for our macroeconomic outlook and if it depreciated further, that would also be helpful for the macroeconomic outlook in terms of economic growth and also inflation," he said. "That would help us move closer to our objectives on the real economy side as well as inflation."

Also supporting the outlook were early signs of stabilisation in the country's subdued property market. Data out on Monday showed that the cities of Sydney and Melbourne were set for their third months of gains in August as sales at auctions picked up, following rate cuts in June and July.

"There are more signs the market has certainly bottomed, but at the same time it doesn't seem to me it's off to the races," Mr Debelle said. REUTERS