Can RBA take rates to zero?
23/02/09 03:55 PM
THIS morning
in Canberra, Reserve Bank of Australia governor
Glenn Stevens is making one of his regular
appearances before the House of Representatives
economics committee. But the extraordinary collapse
in the global economy makes this appearance unlike
any before it.
Committee chairman Craig Thompson told The Australian on Tuesday that a key topic would be what the Reserve Bank would do to support economic activity as interest rates got closer to zero. "We want to know what happens after that (zero), if there is a further need for monetary policy loosening," he said.
This threatens to take today's discussion into potentially quite dangerous territory, even if Thompson is unaware of it.
The Government and the Reserve Bank have been at pains to point out that Australia has a much healthier banking system than much of the rest of the world. Australia is not the US or Japan, where rates are already effectively zero, nor Britain, where there is every chance they soon will be.
Committee chairman Craig Thompson told The Australian on Tuesday that a key topic would be what the Reserve Bank would do to support economic activity as interest rates got closer to zero. "We want to know what happens after that (zero), if there is a further need for monetary policy loosening," he said.
This threatens to take today's discussion into potentially quite dangerous territory, even if Thompson is unaware of it.
The Government and the Reserve Bank have been at pains to point out that Australia has a much healthier banking system than much of the rest of the world. Australia is not the US or Japan, where rates are already effectively zero, nor Britain, where there is every chance they soon will be.
Recognition
of this is crucially important in avoiding the
collapse in confidence in banks that has hit these
countries and that governments are finding it
extremely difficult to deal with. To raise the
prospect of zero interest rates in Australia as a
serious possibility, and have the Reserve Bank
governor discuss it as such, is to invite a panicky
reassessment of our financial system and all this
could entail.
To be clear, the problem is not that central banks are powerless once nominal interest rates hit zero.
The chairman of the US Federal Reserve, Ben Bernanke, made clear in a lecture at the London School of Economics in January that the Fed has an extensive policy tool kit to deal with this situation. But the reason the Fed is having to use this tool kit is because interest rates have proved ineffective, and because the US financial system had seized up, with its big banks arguably insolvent, so the Fed is operating as the banker to the system.
Neither of these things is true of Australia. Our banks are solvent and lending, and monetary policy here still has traction or, as central bankers like to say, the monetary transmission mechanism is working. The minutes of the Reserve Bank's February 3 board meeting tell us that members spent time discussing this: "Members observed that in many countries the central bank rate reductions had flowed through to lending rates only to a limited extent, in particular for housing. They noted that the transmission on monetary policy changes to lending rates had been much more effective in Australia."
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To be clear, the problem is not that central banks are powerless once nominal interest rates hit zero.
The chairman of the US Federal Reserve, Ben Bernanke, made clear in a lecture at the London School of Economics in January that the Fed has an extensive policy tool kit to deal with this situation. But the reason the Fed is having to use this tool kit is because interest rates have proved ineffective, and because the US financial system had seized up, with its big banks arguably insolvent, so the Fed is operating as the banker to the system.
Neither of these things is true of Australia. Our banks are solvent and lending, and monetary policy here still has traction or, as central bankers like to say, the monetary transmission mechanism is working. The minutes of the Reserve Bank's February 3 board meeting tell us that members spent time discussing this: "Members observed that in many countries the central bank rate reductions had flowed through to lending rates only to a limited extent, in particular for housing. They noted that the transmission on monetary policy changes to lending rates had been much more effective in Australia."
Full Story