In a speech made at the Australian Business Economist Dinner, Dr Philip Lowe outlined the options for the Australian economy to reach its 2-3 per cent inflation target, but said it was more likely that interest rates would stay low for an extended period.
Since the global financial crisis, central banks have tried various methods to achieve stronger economic growth.
Mr Lowe said there are four tools that the central bank could implement: negative interest rates, extended liquidity operations, asset purchasing-quantitative easing, or forward guidance.
Dr Lowe noted that conventional monetary policy is working in Australia, as the economy is benefiting from low rates, recent tax cuts, infrastructure spending, and an upswing in property prices.
He said the Australian economy growth prospects and banking systems are stronger than Europe and Japan, meaning “negative interest rates in Australia are extraordinarily unlikely”.
“There may come a point where QE could help promote our collective welfare, but we are not at that point, and I don’t expect us to get there,” Dr Lowe said.
After three cuts to the cash rate, economists, including chief economist for Australia and New Zealand at Goldman Sachs, Andrew Boak, believe the bank has to do something to achieve its inflation target.
The Reserve Bank has missed its inflation target for 15 consecutive quarters, although Treasurer Josh Frydenberg has previously noted the bank will achieve its targets in the medium term.
“In Australia’s case, we actually think QE is not preferable to a direct lending program to banks, we actually think that would be a more effective way to do unconventional policy.”
Given the RBA has previously noted it does not want negative interest rates, QE looks more likely, according to Mr Boak.
