The Reserve Bank of Australia (RBA) has issued a monetary policy update following its monthly board meeting, announcing that it has held the official cash rate at 0.25 per cent, in line with expectations.
RBA governor Philip Lowe previously stressed that the cash rate would remain unchanged for “some years to come”, with the COVID-19 crisis stifling progress towards the RBA’s employment and inflation targets.
However, the central bank reiterated that it is prepared to provide additional stimulus, if required, to support the economic recovery.
According to ANZ Research, additional stimulus could be imminent, with new lockdown measures in Victoria aimed at curbing a second wave of coronavirus outbreaks, threatening to push the economy deeper into recession.
“Events in Melbourne over the weekend have consigned to history the expected upgrade to the RBA’s economic forecasts for 2020,” the research group stated.
ANZ Research said prospective monetary policy easing would likely come in the form of an adjustment to existing policy settings, with the central bank reluctant to employ unconventional tools, which include negative interest rates.
The group stated that the “main options” available to the RBA would be setting the target cash rate at 10 bps or extending the quantitative easing (QE) program beyond the current requirement to “achieve the three-year yield target.”
But according to Richard Carnell, ING Economics’ regional head of research, Asia Pacific, a national monetary policy response to a localised economic crisis in Victoria would be unlikely.
“One of the arguments for the RBA doing more easing today would be the COVID-19 pandemic’s resurgence in the state of Victoria, resulting in a strict lockdown in Melbourne,” he said.
“One could argue that this requires some offsetting policy stimulus. It does. But a local/regional problem does not require a national monetary solution, but a local fiscal response, with the federal government picking up some of the price tag to help out. And that is more than likely what will happen.”
The federal government has already moved to provide fiscal support to Melbourne residents, announcing it would issue a “disaster payment” of $1,500 to those living in the Victorian capital if they are required to self-isolate but do not have adequate sick leave.
Appearing before a Senate hearing to discuss the economic response to the COVID-19 crisis on Thursday (30 July), Treasury secretary Steven Kennedy also noted the limitations of monetary policy.
Mr Kennedy noted that following the global financial crisis (GFC), interest rates were cut by 425 basis points, which would today equate to approximately $100 billion in fiscal stimulus over a 12-month period.
“While actions taken by the RBA are assisting the economy, they are not providing anywhere near the amount of support that they have in the past,” he said.
“This is not just the experience here in Australia, this is happening in many developed countries.
“I suspect that these new circumstances are going to be with us for some time and they have direct implications for monetary and fiscal policy.”
Mr Kennedy added that as a result, “more is going to be expected of governments and fiscal policy in managing economic cycles”.
The Treasury secretary said that fiscal support would be “more powerful” in current monetary policy settings.
“It is highly likely that fiscal multipliers are larger when interest rates are near zero and are expected to remain there for the foreseeable future,” he said.
“In other words, the usual crowding out features of fiscal policy are much less pronounced.”
Mr Kennedy concluded: “Fortunately, Australia is in a very good position to provide appropriate policy responses as it has done to date.
“This is not an invitation to spend in an untrammelled fashion. The intersection of the quantity of the fiscal policy response, be it through tax measures or spending, and the quality of that spending or tax measures will determine our future success.
“And at an appropriate time, moving back towards a balanced budget will be essential to driving quality decisions.”