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RBA not pursuing negative interest rates

For all the drastic measures that have been taken to soften the impact of the coronavirus on the Australian economy, the Reserve Bank has again signalled it won’t be moving to negative interest rates.

In its quarterly statement on monetary policy the central bank says negative interest rates would be an “extraordinary unlikely” course of action, even when it believes the unemployment rate is heading to 10 per cent.

The Reserve Bank concedes negative interest rates would be a stimulatory benefit by putting downward pressure on the Australian dollar.

“But negative rates come with costs too. They can cause stresses in the financial system that are harmful to the supply of credit and they can encourage people to save rather than spend,” it says on the statement released on Friday.

It believes the Australian dollar is “broadly in line with its fundamentals” so there is no need to intervene.

However, Westpac chief economist Bill Evans says the Reserve Bank would be less comfortable if the currency moved markedly above its fair value.

“Under those circumstances, the current policy approach … might have to be reconsidered,” Mr Evans said in a note to clients.

The cash rate was cut to a record-low 0.25 per cent in March and has remained there since.

The Reserve Bank board insists it will not increase the cash rate until progress is being made towards full employment and it is confident that inflation will be sustainably within the two per cent to three per cent target band.

In its latest forecasts, it expects the interest rate sensitive underlying rate of inflation will remain below two per cent until at least December 2022.

It forecasts – in what it calls its baseline case – the unemployment rate will hit a peak of 10 per cent in December, rather than the nine per cent rate predicted three months ago.

It then expects a gradual easing to seven per cent by December 2022.

It still expects economic growth will contract by six per cent this year, but the recovery will be slower than previously thought.

Assistant Reserve Bank governor for economics Luci Ellis said Australia’s economic growth would probably take several years to return to the trend path expected before the virus outbreak.

“The situation in Victoria will reduce growth in the September quarter and push out the recovery beyond that,” Dr Ellis told an Australian Business Economists webinar function.

Finance Minister Mathias Cormann said the situation in Victoria was clearly “having a very bad impact on the economy nationally”.

Separate economic figures showed the pace of contraction in Australia’s services sector and business more broadly slowed in July, but that was before Victoria went into its harsher lockdown to battle the coronavirus.

The Australian Industry Group’s Australian performance of services index rose 12.5 points in July.

But at an index of 44.0 points it remains below the 50-point mark that separates contraction from expansion.

Similarly, its business index rose 11.1 points to 44.7 point.

Ai Group chief executive Innes Willox said these were further evidence the national economy was stabilising before the Victorian shutdown.

“The extraordinary Victorian lockdown and reactions by other states and territories in the light of the outbreak of COVID-19 infections will weigh heavily against any optimistic interpretations of the improvement,” he said.

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