Australia gets ready for QE but claims to reject negative interest-rates

So far the credit crunch era has been relatively kind to Australia. A major factor in this has simply been one of location as its huge natural resources have been a boon and that has been added to by its proximity to a large source of demand. Or putting it another way that is why we have at times given it the label of the South China Territories. However times are now rather different with the headlines being occupied by the subject of the various trade wars and as we have noted along the way this is particularly impacting on the Pacific region. Thus we find that the Governor of the Reserve Bank of Australia has given a speech this morning on unconventional monetary policy as they too fear that the super massive black hole that was the impact of the credit crunch may be pulling them towards an event horizon.


If we look at the state of play as claimed by Philip Lowe you may be wondering why this speech is necessary at all?

The central scenario for the Australian economy remains for economic growth to pick up from here, to reach around 3 per cent in 2021. This pick-up in growth should see a reduction in the unemployment rate and a lift in inflation. So we are expecting things to be moving in the right direction, although only gradually.

This is straight out of the central banking playbook where you discuss such moves and then imply they will not be necessary. They think it is a way of deflecting blame and speaking of deflecting blame interest-rate cuts are nothing to do with them either.

low interest rates are not a temporary phenomenon. Rather, they are likely to be with us for some time and are the result of some powerful global factors that are affecting interest rates everywhere

If interest-rates are indeed set by “powerful global factors” then we could trim central banks down to a small staff surely?


As ever it turns out to be all about “The Precious! The Precious!” for any central banker.

At the moment, though, Australia’s financial markets are operating normally and our financial institutions are able to access funding on reasonable terms. In any given currency, the Australian banks can raise funds at the same price as other similarly rated financial institutions around the world, and markets are not stressed.

You might think that plunging into unconventional economic policy might be driven by the real economy but oh no as you can see there is a different driver. In spite of the effort below to say Australia is different this means that it has learnt nothing and will make the same mistakes.

We are not in the same situation that has been faced in Europe and Japan. 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. So we are in a much stronger position.

Again this is a central banking standard as they claim “this time is different” and then apply exactly the same policies!

QE it is then

We get various denials which I will come to in a bit but the crux of the matter is below.

My fourth point is that if – and it is important to emphasise the word if – the Reserve Bank were to undertake a program of quantitative easing, we would purchase government bonds, and we would do so in the secondary market.

The explanation of why he would choose this option will certainly be popular with Australia’s politician’s.

The first is the direct price impact of buying government bonds, which lowers their yields. And the second is through market expectations or a signalling effect, with the bond purchases reinforcing the credibility of the Reserve Bank’s commitment to keep the cash rate low for an extended period.

You may note that he has contradicted himself with the second point as he has already told us that low interest-rates are “are likely to be with us for some time”.  He then points out again that he has already acted this year.

It is important to remember that the economy is benefiting from the already low level of interest rates, recent tax cuts, ongoing spending on infrastructure, the upswing in housing prices in some markets and a brighter outlook for the resources sector.

That also gets awkward because having cut interest-rates by 0.75% already this calendar year Governor Lowe is implying we could get to his QE threshold quite quickly.

Our current thinking is that QE becomes an option to be considered at a cash rate of 0.25 per cent, but not before that. At a cash rate of 0.25 per cent, the interest rate paid on surplus balances at the Reserve Bank would already be at zero given the corridor system we operate. So from that perspective, we would, at that point, be dealing with zero interest rates.

Why QE?

Well he is clearly no fan of negative interest-rates.

More broadly, though, having examined the international evidence, it is not clear that the experience with negative interest rates has been a success.

Indeed he may even have read yesterday’s post on here.

Negative interest rates also create problems for pension funds that need to fund long-term liabilities.

Or perhaps he has been a longer-term follower.

In addition, there is evidence that they can encourage households to save more and spend less, especially when people are concerned about the possibility of lower income in retirement. A move to negative interest rates can also damage confidence in the general economic outlook and make people more cautious.

Although this bit is quite a hostage to fortune and may come back to haunt Governor Lowe.

The second observation is that negative interest rates in Australia are extraordinarily unlikely.


It is hard not to have a wry smile as central bankers catch up with a point I was making about a decade ago.

Given these considerations, it is not surprising that some analysts now talk about the ‘reversal interest rate’ – that is, the interest rate at which lower rates become contractionary, rather than expansionary

I argued it was in the region of 1.5% and Australia is now well below it so it is I think singing along with Coldplay.

Oh no I see
A spider web and it’s me in the middle
So I twist and turn
Here am I in my little bubble

As to why the RBA is preparing the ground for even more monetary action then let me switch to Deputy Governor Debelle who also spoke today. This starts well.

Over much of the past three years, employment has grown at a healthy annual pace of 2½ per cent. This has been faster than we had expected, particularly so, given economic growth was slower than we had expected.

But in a reversal of the Meatloaf dictum that “two out of three aint bad” we get this.

But the unemployment rate has turned out to be very close to what we had expected and has moved sideways around 5¼ per cent for some time now………Then I will look at wages growth and show that the lower average wage outcomes of the past few years have reflected the increased prevalence of wages growth in the 2s across the economy.

The next issue is that does the mere mention of QE operate in the same manner as The Candyman in the film? If so that is at least 2 mentions in Australia so at the most we have 3 to go before it appears.

Finally with a ten-year bond yield already at 1.06% or about 1.5% lower than a year ago, what extra is there to be gained?





15 thoughts on “Australia gets ready for QE but claims to reject negative interest-rates

  1. Curiously no mention of the housing market by the governor, and yet as in the west, lower rates are always prescribed to keep the bubble going, the recent weakness in the Australian property market has surely driven these moves?

    • Kevin, you got there before me! No surprise that there was little talk of QE etc when the housing market was booming – and did it boom!

  2. Mmm, another country cornered by the zero bound. It would seem we have a growing club of neo liberal democracies who are corralled at the entrance of the knackers yard, all claiming that they are NOT and old horse and all good to pull a cart… despite their outward appearance.

    Yesterday’s point about -ve IRs wrecking pensions I believe is equally true for 0.25%. It just takes a year or two longer to destroy the pots accumulated. Macro Economists are identifying an inflation spike across depressed commodities.

    Get ready for a wild repression on money with runaway supply push price increases. Very few countries control production so it is going to be interesting.

    • Hi Paul C

      It seems that just like Spinal Tap the central banks want to turn things up to 11. The catch for them is why haven’t the efforts so far worked? Anyway if things do not improve quickly for the Australian economy then we can as you imply expect more interest-rate cuts.

  3. Shaun, excellent reporting (again). Given the increasing evidence that negative rates and QE don’t work and, worse, are probably counter productive, it gets harder and harder to understand why Central Bankers keep herding us towards this ‘event horizon’. I’m not a fan of conspiracy theories but the alternative explanations involve not understanding which doesn’t seem likely. So why are they all pushing in the same direction?

    • The two theories I have read most about and seem to be the most believable are
      1.They have to keep the current system going because if they don’t the amount of debt and leverage would cause such damage and chaos that the current central banking system and their control over the west’s economies and governments would then be taken off them.Eventually inflation will take off and ensure debts eventually become manageable and payable.
      2.Similar to 1, but to ensure power is not taken off them they have to make the bust so large and devastating (i.e we’re talking Mad Max type scenario here that any solution they present will be adopted to restore law and order).They know that it is going to all implode eventually but are keeping it going to some time in the future when they will pull the lever and let it implode(PPT stops buying and supporting stockmarket and Fed stops QE/cutting rates)they will wait until the ensuing chaos gets so bad that politicians and the people will be begging for a solution, and hey presto they will present one(that they have already prepared) that involves a new monetary system(more than likely removing the dollar as reserve currency) possibly using a cryptocurrency controlled by the central banks, whatever the outcome they will have consolidated and tightened their grip on governments and increased their power over the peoples of the world.

      • Thanks, Kevin. Option 2 sounds a little far fetched to me. Which leaves option 1 and this looks possible – that they haven’t found a way to reduce debt that doesn’t carry a significant risk of the debt blowing up and breaking the system so, in the meantime, they are treading water and pushing the day of reckoning into the future hoping something will turn up. Scary!

  4. “The bond purchases reinforcing the credibility of the Reserve Bank’s commitment to keep the cash rate low for an extended period.”

    But I though he said that low interest rates were not caused by the RB’s policies but by global factors. That means the question of credibility over their commitment is irrelevant. If those forces change then the cash rate will change whether he’s committed or not.

    Gosh, it’s almost as if he was making this rubbish up as he went along.

  5. Great blog as usual, Shaun.
    After reading your blog I listened to the webcast of RBA Deputy Governor Debelle on employment and wages. A lady challenged his assertion that most of the employment growth has been in the private sector rather than the public sector, and maintained it had been very much in the public sector. Debelle stood by his guns, and said that the LFS data obtained from workers rather than employers showed much higher growth in public sector employment, but this seemed to be because workers didn’t have proper knowledge about whether they were working for a private or a public sector firm! This is fleshed out in a footnote to his paper: “If the LFS data is used, the increase in private sector employment is still larger over recent years, but not by as much. The Labour Account data is gathered from businesses, the Labour Force data from workers. The ABS’s view is that the Labour Account data provides a more accurate account of which industry the job is actually in.” It makes you wonder, if workers cannot be trusted even to know if they is working for a private or a public sector firm, how can he be trusted to make much more difficult judgements about what industry they are working in at a fine level of detail. A former colleague of mine, Sam Boshra, has maintained that the business-based Survey of Employment, Payrolls and Hours (SEPH) provides much more reliable employment data for Canada than the more widely referenced LFS. Debelle’s judgement would seem to support him.
    It’s nice to know that Debelle is a big fan of Pixies.

    • “If workers cannot be trusted to know….” the old argument goes – should they be allowed to vote???
      Debelle believing in pixies means he is in good company – with Sir Arthur Conan Doyle!

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