Lowe rejects calls on negative rates
RESERVE Bank governor Philip Lowe says it is “extraordinarily unlikely” that negative interest rates would be needed to meet the central bank’s inflation and growth targets.
Nonetheless, Dr Lowe has repeated his warning a low cash rate alone might not necessarily stimulate spending and investment.
“I’m not going to speculate on … negative interest rates and quantitative easing in Australia, other than to say that negative interest rates are extraordinarily unlikely in my country,” Dr Lowe said.
He was speaking during a presentation to International Monetary Fund and World Bank meetings in Washington yesterday.
Negative interest rates involve a central bank charging banks to store money with them. The unconventional strategy, which encourages banks to lend out their money rather than store it, has been used in Europe and Japan.
Dr Lowe said that, without non-monetary actions to stimulate investment by reducing risk premiums associated with new capital investment, there was a serious risk monetary policy would become “overburdened”.
Steps should be taken to reduce trade and geopolitical uncertainties, while structural reforms should be made to improve business investment climates, he said.
“In my view we’re now clearly in the world of diminishing returns to monetary easing,” Dr Lowe said.
“If that’s right, then the solution to the problem lies elsewhere … creating an environment that encourages investments.
“Without progress on this front, the main effect of lower interest rates is to push up the price of existing assets, rather than encouraging investments in new assets, which is what’s needed.”
The IMF has recommended that central banks and finance ministries employ more macro-prudential policies to try to mitigate the risks of an extended low-rate period.
Dr Lowe said he was not optimistic macro-prudential tools could effectively mitigate such risks, partly because more of these resided in marketbased financing sources outside bank regulators’ purview.
He has repeatedly called on governments to launch new infrastructure spending.