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RBA rules out negative interest rates for Australian economy

29 November 2019

The Reserve Bank governor has essentially ruled out the possibility of Australia using negative interest rates or other unconventional policies to stimulate the economy.

The RBA has been looking into other countries’ use of negative interest rates, such as Denmark, Sweden, Switzerland and Japan, who have sunk their cash rate below zero to fight against economic slowdown.

RBA governor Philip Lowe said unconventional policies were not on the central bank’s agenda.

“The Reserve Bank has long had flexible market operations that allow us to ensure adequate liquidity in Australian financial markets,” he told the Australian Business Economists dinner this week.

“We have used this flexibility in the past, particularly during the global financial crisis, and we are prepared to use it again in periods of stress if necessary.”

“At the moment, though, Australia’s financial markets are operating normally and our financial institutions are able to access funding on reasonable terms.”

Dr Lowe said it was highly unlikely Australia would follow countries such as Sweden and Japan down the negative interest rate path because the situation was different here at home.

“Our growth prospects are stronger, our banking system is in much better shape, our demographic profile is better and we have not had a period of deflation,” he said.

“So we are in a much stronger position.”

Dr Lowe said the RBA doesn’t want to start buying private sector assets as part of a quantitative easing policy and would rather buy government bonds instead.

“An important advantage in buying government bonds over other assets is that the risk-free interest rate affects all asset prices and interest rates in the economy,” he said.

“So it gets into all the corners of the financial system, unlike interventions in just one specific private asset market.”

“Our current thinking is that QE (quantitative easing) becomes an option to be considered at a cash rate of 0.25 per cent, but not before that.”

Dr Lowe said he expects economic growth to slowly track in the right direction and expects economic growth to hit 3 per cent in 2021.

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