Australia not out of firepower yet, says Lowe

Australia’s central bank is not out of firepower yet and has additional monetary policy options if needed, though negative interest rates are still “extraordinarily unlikely”, Governor Philip Lowe said on Tuesday after cutting rates to record lows.

Earlier, the Reserve Bank of Australia (RBA) trimmed its cash rate to 0.1% and said it would buy A$100 billion ($70.4 billion) of government bonds with maturities of around five to 10 years over the next six months to help keep borrowing costs low.

“Monetary policy is now about more than just short-term interest rates – we have returned to a world in which quantities matter too,” the head of the RBA said in a speech in Sydney.

“We will continue to closely monitor the economic situation and the impact of our purchases on market functioning. If we need to do more, we can and we will,” Lowe said.

The RBA put its monthly bond purchases at around A$20 billion, much higher than market expectations of around A$10-A$15 billion.

Lowe reiterated the RBA was not financing the government, which has unleashed A$300 billion in emergency stimulus to prop up growth this year.

“Our actions are lowering the cost of government finance,” Lowe said.

“I should point that our actions are also lowering the cost of finance for all other borrowers in Australia, whether they are a household buying a home or a business wanting to expand. This lower cost of finance for everybody is supporting the recovery from the pandemic.”

The RBA upgraded its near-term forecasts for the country’s A$2 trillion economy, although it sees a number of headwinds in the medium term, including lower population growth.

Lowe said the big risk at the moment was from an extended period of high unemployment.

The jobless rate is hovering near 7%, having risen from around 5% before the COVID-19 pandemic.

“We need to recognise that the pandemic has inflicted significant damage on our economy. It will take time to repair that damage and it is highly likely that the recovery will be uneven and drawn out,” Lowe said.