Monetary Policy to Take a Backseat

Daily Commentary BY THE CURVE TEAM –

Monetary Policy to Take a Backseat

6th of November, 2020

RBA Board member and Treasury Secretary sheds light on what policy leavers will be needed to drive the economy forward.

Governor Lowe stressed following the their board meeting on Tuesday that RBA isn’t out of firepower and that it stands ready to take further action if required. He did admit that this action wouldn’t come from further adjustments to interest rates, such as going into negative territory, but would be driven by unconventional policies such as quantitative easing.

The Treasury Secretary, Steven Kennedy, who also is a RBA board member, spoke yesterday to the Australian Business Economists lunchtime briefing suggested that it won’t be the role of the RBA to do the heavy lifting during the current downturn.

He highlighted that despite it usually being the role of the RBA use monetary policy to fill the output gap in a downturn, things were different this time around. Instead it was up to other policies, saying that:

While the RBA’s actions will provide important additional support, the scope for these policies to provide sufficient stimulus is limited and has necessitated the large levels of fiscal support both at the onset of the pandemic and in the Budget.

It isn’t isn’t just the Federal Fiscal policy lever that is required with the states to be called on too. Kennedy went on to say:

“Given the lack of monetary support available, the states and territories can also play an important role in supporting the economic recovery, especially in the areas where they have primary responsibility and are better placed to design and implement policy, including social and other infrastructure.”

His speech confirms that the RBA is going to be taking a back seat this time around with fiscal spending the key policy leaver used to fill the output gap over the short term. However, for a long term sustainable uplift in growth, policy reform will be required, otherwise we face an extended period of low growth, low inflation and higher unemployment than would otherwise be the case.

David Flanagan

Director - Interest Rate Markets