Warning against going negative

NATIONAL Australia Bank acting chief Philip Chronican has warned the Reserve Bank should not cut the cash rate below zero as part of any unconventional measures to stimulate the economy.

The veteran banker says the controversial policy of taking the cash rate into negative territory has not been “particularly helpful” in economies where it has been adopted, such as Japan and in Europe.

“Negative interest rates have got all sorts of complications we don’t even want to contemplate,” Mr Chronican told Business Daily.

“I don’t think it is particularly helpful — it has not been a good thing to watch negative interest rates at work in some of the more very-low inflation economies in Europe and Japan.

“Australia, which has been a strongly growing economy for more than 200 years, should not have to get itself into negative interest rate territory.”

Under a negative interest rate policy, the RBA would effectively charge banks to store their spare cash.

The policy aims to encourage banks to lend the money out — stimulating the economy — rather than holding on to it.

Major economies including Switzerland, Sweden, Denmark and Japan have adopted the extraordinary policy at various times over the past 50 years.

Back-to-back interest rate cuts by the RBA and an inflation rate that has been below the central bank’s target range for three years has sparked predictions it will be forced to unleash so called “unconventional” measures in the not too distant future. Among those on offer is quantitative easing and negative interest rates.

Quantitative easing involves a central bank buying up bonds using newly created money, effectively increasing the amount of cash running through the economy.

Capital Economics senior economist Marcel Thieliant has said the RBA could cut the cash rate to minus 0.5 per cent and launch a money-printing program if back-to-back interest rate cuts, coupled with the boost to tax returns from tax reforms this year, failed to lift spending.

Mr Thieliant estimates there is a 30 per cent chance the RBA will be forced to adopt such measures in the next couple of years.

Citi chief economist Paul Brennan warns unconventional measures are a definite possibility. Mr Brennan has noted the average cumulative rate cut delivered by the RBA in its previous four easing cycles — periods where it is cutting rates — has been 3 percentage points.

Given the RBA started its latest easing round with the cash rate at 1.5 per cent, history suggested it could go to minus 1.5 per cent, Mr Brennan said in a research report published earlier this year.

The Australian Securities Exchange has also revealed it has begun “investigating the impact of zero and negative interest rates”.