Here's What the RBA Is Thinking on Unconventional Policy Options

(Bloomberg) --

The Reserve Bank of Australia has outlined its thinking on the prospect of adopting unconventional monetary policies, now that its cash rate is at a record-low 1% and more cuts are forecast. The remarks were published on the central bank’s website Wednesday, and are in response to a lawmaker’s questions following last month’s semi-annual testimony in Canberra.

Most of the comments are a reiteration of earlier statements and speeches. Here are the key takeaways:

On The Options Available:

“While at this point it is unlikely that the Reserve Bank will need to employ unconventional monetary measures, the Reserve Bank Board considered it prudent to understand the issues involved and has studied the experience of other countries.”

Measures that have been employed elsewhere fall into six broad categories, as follows:

• very low and even negative policy interest rates
• explicit forward guidance that policy rates will remain at a very low level until some time has passed or until certain conditions are met
• purchasing government securities, so as to lower longer-term risk-free interest rates
• providing longer-term funding to banks to support credit creation, typically at a favorable price and on the condition that banks lend
• supporting financial conditions more broadly by purchasing private sector assets, such as mortgage-backed securities, corporate bonds or –- in a few cases –- even equities
• foreign exchange intervention

On the Key Lessons the RBA Has Drawn:

• “They have been successful in lowering government bond yields, which in turn lowered interest rates across the economy for private borrowers, since government bond yields are the risk-free rates underpinning all these interest rates”
• “A package of measures that reinforce each other tended to be more effective than measures implemented in isolation”
• “It is important for the central bank to communicate clearly and consistently about the unconventional measures when they are implemented”
• “We consider the U.K. experience to be relevant to Australia, because the structure of the financial system, the composition and level of household debt, and pattern of ownership of housing and other assets resembles that in Australia fairly closely”

• “The general conclusion of this work is that –- as for more conventional monetary policy easing –- the first-order effect of quantitative easing is to increase incomes for households who would otherwise be unemployed. In Australia as well as in those other countries, the households that benefit most from lower unemployment are young, low-income and have few assets. Asset prices are also supported by this policy, but the effect of this on asset-owners’ incomes and wealth is smaller than the effect of reducing unemployment on lower-income households.”

On the Likelihood Of Such Measures in Australia:

• “At a cash rate of 1%, the Reserve Bank Board still has scope for conventional policy easing, should it be required. While unlikely at the current juncture, if circumstances were to warrant it, the Board would consider unconventional monetary policy options”
• “Which of the measures used in other countries would be appropriate for Australia would depend on the specific circumstances at the time. While it is difficult to rule any specific measure in or out, the focus would likely be on reducing the risk-free interest rate. This would involve reducing the cash rate to a very low level and possibly purchasing government securities to lower the risk-free rate further out along the term spectrum”

Other Key Takeaways:

• “Taken together, estimates from work at the Reserve Bank suggest that lowering the cash rate by 100 basis points leads to economic activity, as measured by GDP, being 0.5 to 0.75 percentage point higher than it otherwise would be over the course of two years. Lower interest rates and a stronger economy benefit the community as a whole, but the effects on individuals will differ.”

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

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Chris Bourke

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