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Reserve Bank Deputy Says Rate Cuts Are Aiding Australia’s Economy

Reserve Bank Deputy Says Rate Cuts Are Aiding Australia’s Economy

(Bloomberg) -- The Australian central bank’s No. 2 official said interest-rate cuts are supporting the economy by ensuring stronger demand, while acknowledging the supply-side impact of the coronavirus is impervious to monetary policy.

Lower rates “will provide more disposable income to the household sector and those businesses with debt,” Reserve Bank Deputy Governor Guy Debelle said in a speech in Sydney on Wednesday. “They may not spend it straight away, but it brings forward the day when they will be comfortable with their balance sheets and resume a normal pattern of spending.”

Reserve Bank Deputy Says Rate Cuts Are Aiding Australia’s Economy

Debelle provided an economic lay-of-the-land in his address, reiterating that the hit to tourism and education was expected to cut 0.5 percentage point in the first quarter. He said it is “just too uncertain to assess the impact” of the virus beyond then.

The RBA cut its cash rate last week and money markets are pricing in a further reduction in April that would bring it to the effective lower bound of 0.25%, opening the door to unconventional policy. The government is finalizing a spending package to deliver a fiscal-monetary shot that Debelle said will help policy makers navigate the period.

Australia’s easing has coincided with moves in a number of countries and the RBA’s No. 2 said of global monetary policy that “further reductions are expected where that is possible.”

Aussie QE

Asked after the speech about the prospect for unconventional policy in Australia, Debelle said there are scenarios that the central bank would have to consider this. He said the bank would likely act in the government bond market as necessary “to keep the risk-free rates low.”

The RBA would also “talk about the likely future path of interest rates, generally known as forward guidance,” Debelle said. “To validate that, we’d need to be operating in the bond market as necessary to keep government bond rates consistent, or the risk-free curve consistent, with our outlook for interest rates.”

Following the Bank of Japan’s method, which sets a target for government bond yields -- known as yield curve control -- rather than buying a certain amount of bonds a month is the preferred approach, Debelle signaled.

“It’s easier to think about it more in terms of the price sense than in the quantity sense,” he said. “If you’re thinking about trying to keep the front end of the risk-free curve low for a period of time then that’s more analogous to an interest-rate reduction.”

So that would involve an “objective” for government bond yields.

Market Disruption

In his speech, Debelle said an inability to calibrate the economic fallout from China’s shutdown and the virus’s spread has led to wild swings in markets trying to estimate risk of financial assets. He said the Australian banking system is “well capitalized” and in “a strong liquidity position” and lenders “are resilient” to a period of market disruption.

“We have not seen any particular sign of pressure in our daily market operations to date,” he said. “The spread between the bank bill swap rate and the expected policy rate (OIS) has risen in recent days but remains low, nothing at all like what occurred in GFC.”

The RBA is gathering information on supply chain disruptions in the economy, with Debelle pointing out construction and retail are particularly affected. Liaison with the resources industry “does not indicate any material disruption to exports of iron ore and coal at this stage,” he said.

The currency’s decline since the start of the year is cushioning some of the blow and fiscal-monetary stimulus will “ensure the Australian economy is well placed to bounce back quickly once the virus is contained,” he said.

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editors responsible for this story: Paul Jackson at pjackson53@bloomberg.net, Alexandra Veroude, Malcolm Scott

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