RBA holds cash rate but will we see negative interest rates?
The Reserve Bank of Australia (RBA) has kept rates on hold at the historic low of 0.25%, as expected. But this hasn't stopped leading economists talking up the possibility of negative interest rates over the coming year.
With the government's early COVID-19 lockdown measures, Australia has managed to flatten its infection rate and avoid the doomsday scenarios suffered overseas.
Just a month ago, the RBA forecast a fall in output by around 10% over the first half of 2020 and by around 6% over the year as a whole, with unemployment peaking at around 10%.
But the outlook has since improved in Australia.
"While it's still early days, the Australian central bank and the Morrison government's largesse have moderated earlier expectations for a sharp contraction in the domestic economy," says Benjamin Ong, director of economics and investments at Rainmaker Information, which also publishes Money magazine.
"The earlier than expected flattening of the covid-19 curve and the consequent gradual lifting of social interaction restrictions and lockdown measures are starting to have a positive impact on confidence."
On May 28, RBA Governor Philip Lowe told the Senate Select Committee on COVID-19 that the mid-March package is working as expected.
"With the national health outcomes better than earlier feared, it is possible that the economic downturn will not be severe as earlier thought."
Despite this, some economists are floating the possibility of negative interest rates in the coming 12 months.
Westpac chief economist Bill Evans believes negative interest rates, never before experienced in Australia, could help promote investment lending and reign in the rising Aussie dollar.
"A serious case can be made for the RBA to consider further cuts and entering negative territory for the cash rate if it becomes apparent that the economy is deteriorating even more than is currently expected," he says.
"A small open economy with significant foreign liabilities would certainly see a substantial improvement in the competitiveness of the currency with further rate cuts when other major markets are anchored at their effective lower bounds."
Similarly, RBC Capital chief economist Su-Lin Ong believes we're one negative economic event away from a shift in the RBA's tone to include the possibility of negative rates.
"In the event of another shock, including a significant second wave of COVID-19 domestically or globally, and/or central banks that increasingly adopt a negative cash rate stance, pressure will mount on the RBA to bring negative rates onto its agenda."
To be sure, a move to negative rates seems only an outside chance. Governor Lowe has consistently thrown cold water on the idea.
"I said previously that it was extraordinarily unlikely that we would have negative interest rates, and there's been no change to that thinking," he said late last month.
Still, an about-face is not impossible. As Su-Lin Ong points out, quantitative easing (QE) was off the cards, until it wasn't.
However nothing in today's rate decision suggests Lowe will embrace negative interest rates. Rather, he pointed out normalising work hours and increasing consumer spending. Both are promising signs during uncertain times.
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