In Australia, QE Is No Longer a Dirty Word


(Bloomberg Opinion) -- The Reserve Bank of Australia's first interest-rate cut in three years is significant and warranted. But for all the import of Tuesday’s quarter-point move, it may just be a warm-up for the big event: the prospect of quantitative easing.

It may sound crazy that an economy frequently lauded as nirvana would consider the kind of bond buying deployed by the biggest central banks during the Great Recession. In Australia, QE had long been seen as a kind of foreign disease, and wasn’t mentioned in polite company.

It ought to be seriously considered, though, and not only as a lesson in humility.

For a central bank whose main rate could conceivably approach zero in a year's time, RBA officials need to contemplate what happens if further easing is required to meet its 2% to 3% inflation target, let alone prevent the current slowdown from morphing into the first recession in three decades.

The RBA statement Tuesday had a non-committal tone. Downside risks to the global picture have increased, and while local job growth has been strong, a pickup in wages would be welcome. “The Board will continue to monitor developments in the labour market closely and adjust monetary policy to support sustainable growth in the economy and the achievement of the inflation target over time,” it said.

The question of further adjustment becomes more pressing if the Federal Reserve kicks off a sustained global easing cycle with rate cuts in the coming months. Investors are anticipating lower U.S. rates before the end of the summer.

Not that a Ben Bernanke-style rescue is in the immediate future. With today's cut, the RBA's main rate is 1.25%, which still leaves Governor Philip Lowe with scope for a bit more trimming.

Australia's growth has slowed, but the economy is still ticking over and the jobless rate is around 5%. Prime Minister Scott Morrison, fresh from an election win, has pledged plenty of tax cuts. That would be the kind of fiscal support that many central bankers often seek, but rarely receive. 

An antipodean recession, or the proximity of one, isn't what drove Tuesday's rate cut. In the lead-up to the decision, the RBA framed its calculations around the need to get inflation up to target, somewhere it hasn't been since 2015 and won’t be until 2020, according to central bank forecasts. To achieve that, the RBA has reasoned, the unemployment rate needs to fall below 5%. Recent numbers show the labor market weakening, not strengthening.

To get where the RBA wants to go, several cuts are required. Westpac Banking Corp. foresees multiple reductions in the next six months. JPMorgan Chase & Co. thinks the main rate will be 0.5% by the middle of next year, a full percentage point below where it was before Tuesday's trim. If the central bank wants to stay utterly conventional, then there's not much left in the cupboard if activity really slumps. That's where the QE scenarios start to make an entrance.

Lowe has been inching toward Tuesday’s step since the start of the year. But that journey hasn't happened in a vacuum. Since the RBA began transitioning from a glass-half-full perspective to glass-half-empty, the global outlook has dimmed materially.

In his exit interview with the Australian Financial Review in 2016, Lowe's predecessor Glenn Stevens was skeptical of QE but sympathetic to the much larger economies that undertook it. “We haven't been in that position and hopefully we won't be,” he said.

Hope may not be enough. At a minimum, QE is now rightfully part of the debate in this idyllic economy.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

©2019 Bloomberg L.P.

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