RBA Governor Philip Lowe Stares at Super Low Interest Rates

Summary

• The Governor of Reserve Bank of Australia (RBA), Philip Lowe has signalled the likelihood of a further interest rate cut 
• A super low interest rate is expected to boost growth in jobs and ease up currency strains
• In March 2020, the RBA lowered the official interest rate to 25 basis points due to the Covid-19 pandemic
• Lowe assured that the elevated levels of debt disclosed in the federal government’s October budget was completely manageable

Reserve Bank of Australia Governor Philip Lowe, in a speech, revealed that the bank was considering to further ease the interest rates. He said that the move would create a more massive effect when the economy gains back the momentum. 

Lowe, while addressing the Citi Group annual investment conference recently, hinted at the possibility of a further interest rate cut to back the nation’s financial revival from the corona-induced recession. He also shared that this step could favour growth in jobs and even help alleviate currency pressures.

The effects of additional monetary easing

While economists had placed the possibility of another cut at 40% upwards, RBA Governor Lowe said that there were a couple of considerations in his mind.

Also read: Philip Lowe: 5 reasons to stay ‘fundamentally optimistic’ on Australia

Lowe said that the first thing on his mind was how much propulsion to the economy could be derived from further economic easing. Leaving aside the area of Victoria, the employment sector had started to bounce back since the middle of the lockdown. 

Although a rate cut seems to be on the cards, the RBA is taking its own time to reveal the details and most probably, the revelation will happen when it is going to have the largest impact.

In this regard, Lowe further stated that the RBA has kept the interest rates on hold for October and that the Federal Budget would also embrace the further boost to the economy. 

Lowe explained further that the monetary support requires augmented borrowing, a change for a country like Australia that had become used to low budget deficits and low levels of public debt. But Lowe also maintained that the change is completely manageable and within means and is the best thing that can be done in the nationwide interest right now. 

Also read: Key takeaways from Philip Lowe’s stance on rate cuts and stimulus

Effect of easing on economic stability and long-standing macroeconomic strength

Lowe, in his address, also expressed that RBA is concerned about the aftereffect of a further interest rate cut on the financial stability and the longer-term macroeconomic stability. Cutting of the interest rate would mean generating employment and decreasing the risk of people who fail to pay their loans back. 

But since there is always a give-and-take policy in the world of economics, the overall calculated benefit needs to be evaluated against any further risks as people are likely to take more risk in the quest for return while investing. Lowe stated that the effect of low interest rates would be considered for people who solely depend upon the interest income. 

Good read: How is the negative interest rate prospect panning out for Australia

Image Source: © Kalkine Group 2020

Australia’s economic actions in comparison to other countries

Philip Lowe, in his address, said he was concerned with what Australia was doing as compared to actions taken by other countries and their central banks.   

In his speech, Lowe also touched on the rising debt that was mentioned in the federal government’s budget announced in October. Lowe assured in his speech that this biggest deficit since World War 2, is manageable and in the interest of the country. He continued saying that the liability throughout the government sectors in Australia is comparatively on the lower side than in several other countries. 

Philip Lowe also mentioned that the country’s two-speed economic healing was getting hit by Victoria’s non-stop shutdowns, affecting the city’s capacity of expenditure along with the employment numbers. 

In August, retail spending in Victoria was low by 11% as compared to the starting of the year, whereas retail expenditure throughout the rest of the country went up by 13% during the same span. 

Lowe revealed that the Covid-19 affected small businesses more than the big ones. It should be noted that employment in Victoria went down by 8% as compared to March.

Don’t miss: Australian Economy: RBA toes the line, keep the rates unchanged at an all-time low

After-effects of imposing low interest rates 

Ultra-loose financial policies can be even counterproductive for financial systems of various countries. The RBA governor had earlier mentioned that for every dollar the domestic segment collected in interest income, it gave more than two dollars in interest payments. Therefore, in totality, lower interest rates help the economy as they enable consumers to spend more. Lower interest rates stimulate business financing, lower borrowing costs for the governments, unrestricted spending, aid exports by slashing currency and thereby create a ‘wealth effect’ that boosts household expenditure by increasing the prices of assets. 

The same mindset has driven central banks to reduce interest rates. The significance of low interest rates comprises: 

• Low rates appear to hurt consumer spending and even business investment as they indicate that authorities are pessimistic and anxious.  
• Low interest rates push for borrowing to a large extent. 
• Low and adverse interest rates can raise asset prices. 
• Lower interest rates affect the business models of insurers and pension funds which usually use the constructive returns of government bonds to accomplish long-term liabilities.
• Low interest rates put pressure on bank margins.
• Low rates may push banks to curb lending.
• Low interest rates may lead to increased savings as they might compel people to save more to accomplish their savings targets.
• Low interest rates may push inefficient investment. 
• Lower rates somewhat push the economies in a debt trap. The term debt trap suggests how indebted economies require more debt to overcome the problems generated by previous debt.

The consequences mentioned above describe why lower rates have many times failed to lift the economies.