The central bank remains prepared to cut rates further, despite growing concerns that monetary policy has “lost its potency”.
The Reserve Bank of Australia (RBA) has released minutes from its monetary policy board meeting earlier this month, reiterating that it is prepared to drop the cash rate to new lows “if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time”.
The latest economic indicators are pointing to further easing from the RBA, with the latest Labour Force data from the Australian Bureau of Statistics (ABS) reporting that the unemployment rate increased to 5.3 per cent.
Analysts are expecting the RBA to lower the cash rate at least once in the coming months.
AMP Capital senior economist Shane Oliver is expecting the RBA to move twice in the months ahead, forecasting reductions in both December and February, which he said could accompany quantitative easing.
However, the RBA’s easing strategy has come under scrutiny, with stakeholder’s casting doubt over the effectiveness of further cuts.
Among the latest to weigh in on the debate is NAB chair Philip Chronican, who, in his appearance before the House of Representatives standing committee on economics, claimed that the monetary policy instrument has “lost its potency”.
Mr Chronican said he is concerned the RBA has undermined its own capacity to stimulate the economy in the event of a downturn.
“To get to ultra-low interest rates when the economy is in good shape suggests that there’s not a lot left in the event that we do get a shock,” he said.
“My concern about the current very low interest rates is that we’ve largely exhausted our firepower on monetary policy, and that if we want to see growth in the economy, we’ll need to look at other forms of growth-promoting activity.”
Later in the proceedings, the NAB chair added that he would be “troubled” if the RBA took the path of its foreign counterparts and pushed rates into negative territory.
“I think, as a number of other parties both here and offshore agree, taking an economy like ours into negative interest rate territory just doesn’t seem appropriate,” he said.
“I would be troubled by that.”
Mr Chronican joined calls for a greater emphasis on structural reform to spur economic growth and reduce reliance on monetary and fiscal policy stimulus.
“For me, there are three legs to the stool, not just two,” he said.
“Monetary policy and fiscal policy are useful at the right time and in the right context for helping stimulate economies, but the long run rate of growth in the economy is a function of the productivity reform agenda.
“While I certainly appreciate that there are positives that can come from the use of fiscal measures, particularly if they do support business investment – I’m absolutely supportive of that; anything that can help our business customers invest for growth would be helpful – I also think that we need to get structural reform back on the agenda.
He concluded: “That’s where I’ve probably put more of my emphasis.”