More Rate Cuts and ‘Quantitative Easing’ could be Resorted to by Australian Reserve Bank: NAB

Experts have warned that if global headwinds persistently continue to weigh on the economy, US and European-style monetary easing policies could be needed to be followed by the Reserve Bank of Australia in addition to it being forced to cut the cash rate to 1% in the next 12 months.

The central bank faces a scenario where a deteriorating economic outlook brings at least two more reductions despite already cutting the rate twice in 2016 to unprecedented levels.

National Australia Bank economists warned on Tuesday that quantitative easing could be the next resort for the bank after this. Quantitative easing is an unconventional monetary policy which is used by central banks in the US, Japan, UK and Europe where government bonds are bought by the central banks by printing more money. Some of the central banks of larger world economies have resorted to this policy to respond to global financial crisis.

As resources exports levelled off and housing construction slowed, longer-term risks for Australia were becoming more apparent while the short-term outlook was upbeat for Australia, the NAB said on Tuesday while releasing its monthly business survey.

“Against these headwinds, the economy may require additional policy action to support growth, especially if the RBA hopes to see inflation return to within its 2-3% target band. Both global and domestic disinflationary pressures are expected to keep inflation below the target band for an extended period, while structural shifts in the economy and modest economic growth risk upward pressure on the unemployment rate,” the chief economist at NAB, Alan Oster, said.

“We now expect the RBA will need to provide further support through two more [quarter percentage point] cuts in May and August 2017 [to a new low of 1%], which should be enough to stabilise the unemployment rate at just over 5.5% and prevent economic growth from dropping below our forecast of 2.6% in 2018. And thereafter raises the prospect of the RBA thinking about the use of non-conventional monetary policy measures,” Oster added.

The confidence index for July is below the average of +6 and eased slightly to +4 index points in July from +5, showed the NAB monthly business survey. However, still placed well above the long run average of +5, the business conditions was recorded at +8 index points, though down slightly in July index points from +11.

Confidence has been pushed to its lowest level in nine weeks as consumers have grown pessimism about the short-term economic outlook which has underlined the difficulties facing the Australian economy, a survey showed.

According to the ANZ-Roy Morgan weekly consumer confidence survey published on Tuesday, two weeks of gains for consumer confidence was erased as it fell 2.8% in the week ending 7 August. However, it remains above the long-term average.

The sharp fall was disappointing in the same week the RBA cut its cash rate to a historic low of 1.5%, said ANZ’s head of Australian economics, Felicity Emmett.

“The weakness in confidence is more pronounced in the near-term economic outlook – possibly reflecting some concerns over the health of the global economy,” said Emmett.

(Adapted from Bloomberg)

Categories: Economy & Finance

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