Re­serve flags rate cut, cash splash

The Australian - - FRONT PAGE - ADAM CREIGHTON ECO­NOM­ICS ED­I­TOR

The Re­serve Bank has paved the way for fur­ther cuts to the of­fi­cial in­ter­est rate and could even re­sort to quan­ti­ta­tive eas­ing — “print­ing money” to buy gov­ern­ment bonds — to ward off a po­ten­tial down­turn.

In a ma­jor speech last night, RBA deputy gov­er­nor Guy De­belle de­clared the cen­tral bank was pre­pared to “go fast, go hard and not die won­der­ing” by stim­u­lat­ing the econ­omy — a nod to the Rudd gov­ern­ment’s $52 bil­lion cash in­jec­tion to in­su­late against the global fi­nan­cial cri­sis.

He also warned that a lend­ing slow­down could hurt the econ­omy, in a sign the bank is fret­ting about the po­ten­tial fall­out from an emerg­ing slump in house prices. “There is a risk that a re­duced ap­petite to lend will overly cur­tail bor­row­ing with con­se­quent ef­fects for the Aus­tralian econ­omy,” Dr De­belle said.

Not­ing the Re­serve Bank had “re­peat­edly” said the next move in in­ter­est rates was more likely up than down, Dr De­belle said there was “still scope for fur­ther re­duc­tions in the pol­icy rate”.

“It is the level of in­ter­est rates that mat­ters and they can still move lower,” he added, in re­marks that could fore­shadow a sharp reap­praisal of the out­look by the Re­serve Bank board when it next meets in Fe­bru­ary, af­ter the sum­mer break.

The of­fi­cial in­ter­est rate has been un­changed since Au­gust 2016, when for­mer gov­er­nor Glenn Stevens re­duced the cash rate to a record low of 1.5 per cent — the fi­nal in a se­ries of cuts that has seen the rate fall from a 10year peak of 4.75 per cent in late 2011.

The plain-speak­ing Dr De­belle, a cur­rency and bond mar­ket vet­eran, said the Re­serve Bank was also pre­pared to cre­ate new money to buy gov­ern­ment bonds from pri­vate banks, a pol­icy pur­sued vig­or­ously — and con­tro­ver­sially — by cen­tral banks in the US, Ja­pan and Europe to try to keep in­ter­est rates low.

“Quan­ti­ta­tive eas­ing is a pol­icy op­tion in Aus­tralia, should it be re­quired,” he said, adding it could be even more ef­fec­tive here than abroad be­cause of the scarcity of Aus­tralian gov­ern­ment bonds.

His com­ments come against a back­drop of de­te­ri­o­rat­ing eco­nomic data: house prices and build­ing ap­provals have been fall­ing, while the na­tional eco­nomic growth rate dropped from 3.4 per cent to 2.8 per cent, it emerged this week, sur­pris­ing economists.

An­a­lysts at rat­ing agency Fitch said yes­ter­day the Re­serve Bank’s growth fore­casts were “overly op­ti­mistic”.

“We are bear­ish on the Aus­tralian econ­omy, which dif­fers sharply from the RBA’s up­beat out­look,” it said, dump­ing its ex­pec­ta­tion the RBA would lift

rates any time in 2019. Speak­ing at the Aus­tralian Busi­ness Economists’ an­nual din­ner, Dr De­belle said the fed­eral gov­ern­ment had room to bor­row and spend to stim­u­late the econ­omy, if needed.

“Fis­cal space is re­ally im­por­tant; we still have that in Aus­tralia,” he said, back­ing for­mer trea­surer Wayne Swan’s con­tro­ver­sial $52bn fis­cal stim­u­lus of late 2008 and early 2009, which gave $900 pay­ments to house­holds, help for first-home buy­ers, dis­count roof in­su­la­tion and a school hall build­ing boom.

“Fis­cal stim­u­lus in Aus­tralia in my view was ab­so­lutely nec­es­sary and was a crit­i­cal fac­tor be­hind Aus­tralia’s good eco­nomic out­comes,” Dr De­belle said.

Adam Boy­ton, chief econ­o­mist of the Busi­ness Coun­cil of Aus­tralia, said main­tain­ing fis­cal “fire­power” was crit­i­cal. “When it comes to the bud­get, that means not just get­ting back into sur­plus but re­duc­ing debt too,” he said.

In a speech that fo­cused on the per­ils of ex­ces­sive debt and lever­age, Dr De­belle said the jury was still out on how much was too much. “We still don’t re­ally have a great han­dle on what level of lever­age is dan­ger­ously ex­ces­sive for gov­ern­ments, house­holds, banks and cor­po­rates,” he said. “Lever­age sig­nif­i­cantly mag­ni­fies the ef­fect of any shock that hits the econ­omy; it might not start the fire, but it will pour petrol on a burn­ing plat­form.’’

Stan­dard mea­sures of house­hold lever­age, which showed to­tal mort­gage debt was 27 per cent of the value of hous­ing in June, could pro­vide false com­fort, he sug­gested. “(They are) very much de­pen­dent on the value of the de­nom­i­na­tor, house prices in this case, and we know they can de­cline quite rapidly,” he said.

The sim­i­lar­ity of the big four banks, reel­ing in the wake of the fi­nan­cial ser­vices royal com­mis­sion, was “not so ob­vi­ously ben­e­fi­cial”, leav­ing the door open to ideas that they should main­tain higher lev­els of cap­i­tal.

“Their sim­i­lar be­hav­iour and sim­i­lar re­ac­tion func­tions to events such as fall­ing house prices run the risk of am­pli­fy­ing the down­turn in the hous­ing mar­ket,” Dr De­belle said.

“Those such as Anat Ad­mati still make the ar­gu­ment that fur­ther re­duc­tion in lever­age is nec­es­sary.’’

Stan­ford’s Pro­fes­sor Ad­mati slammed the bank­ing reg­u­la­tor APRA in The Aus­tralian this week for “out­ra­geously in­ad­e­quate” min­i­mum cap­i­tal stan­dards.

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