Never Say Never on RBA Turning to Negative Rates, Ong Says

(Bloomberg) -- The possibility that Australia’s central bank will turn to negative interest rates can’t be ruled out completely, but it has other options in its policy toolkit before it heads down that path, Royal Bank of Canada’s Su-Lin Ong said.

Appearing as a panelist on Bloomberg’s ‘Inside Track’ webinar series Thursday, Ong said the Reserve Bank of Australia could first turn to strengthening its forward guidance, stepping-up bond buying, lowering its three-year yield target or extending targets further out the curve.

The central bank “has a lot of options before it would head down that negative rate path,” said Ong, head of Australian economic and fixed-income strategy at RBC. However, “what we’ve learned from the past few months, you probably never say never and if there was, for whatever reasons, a global push toward negative rates, then there probably would be pressure on the RBA in that regard.”

The negative-rate debate has escalated globally in recent weeks, led by the Bank of England and Reserve Bank of New Zealand, which have said it’s a policy option. The Federal Reserve, Bank of Canada and RBA have pushed back against the idea, with RBA Governor Philip Lowe saying it’s “extraordinarily unlikely” Down Under.

“Circumstances both here and offshore would have to deteriorate quite substantially before the RBA would entertain that idea,” Ong said.

The RBA cut its cash rate to a record-low 0.25% and initiated a bond-buying program in March, seeking to bring down borrowing costs across the economy. It targeted a yield of 0.25% on three-year bonds, buying more than A$50 billion ($34.6 billion) to stabilize markets and achieve that rate. The bank gradually scaled back its bond buying and hasn’t purchases securities since early last month.

“We think that the RBA is done for the time being,” Giulia Specchia, a rates strategist at UBS Group AG in Sydney, said during the same forum. “The three-year bond yield is 25 basis points, so that is done, and the purpose of buying bonds longer than three years was to bring liquidity back to the market and that has been successful.”

Still, she’s not ruling out a return to the market for the central bank.

“If the economy doesn’t turn up, turns weaker, or if the market is unable to support all the bonds that will be issued in the coming months, then the RBA will come back to the market in a more regular fashion,” she said. “But for now the curve is steep and is likely to remain steep.”

RBC’s base case is for the RBA cash rate to remain at 0.25% for at least three years as the economy recovers later this year and into 2021. Ong warned the recovery was likely to be “very modest,” characterized by high excess capacity that will keep inflation and wage growth low.

“I think you will see elevated levels of unemployment for some time,” she said. “The RBA is going to need to keep its official rate low and signal that, and it’s done so pretty clearly.”

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