Likelihood of RBA adopting alternative policy measures rises with cash rate getting closer to effective lower bound, says ANZ Research

With the cash rate getting closer to its effective lower bound, the likelihood of the Reserve Bank of Australia (RBA) adopting alternative policy measures is growing, according to the latest report from ANZ Research.

Previous research has shown that other central banks have used alternative policy measures (QE and term lending facilities, in particular) to boost GDP growth and inflation. In this note, we ponder the potential effectiveness of such policies in Australia.

The RBA has noted in the past, the importance of tailoring the mix of alternative polices to the specific needs of the economy. This will be an important consideration, given that the effectiveness of QE and targeted lending facilities will depend on conditions in Australia at the time. Given this, the RBA may need to contemplate other policy measures (the nature of which is unclear), the report added.

The RBA has made various comments on the issue. In a written response to questions put to the central bank at its regular parliamentary testimony in 2019, it made a couple of key points about its thinking on alternative policy measures:

• The mix of measures used would depend on the economic and financial circumstances being addressed.
• The focus would be on “reducing the risk-free rate.” This would include the “possible purchasing of government securities to lower the risk-free rate further out along the term spectrum.”

Quantitative easing (particularly through the purchase of ACGBs) along with explicit forward guidance is the alternative policy measure the RBA would be most likely to implement.

Looking through the prism of the four main policy transmission channels, there are challenges to QE’s impact via the first three (cash flow, currency and investment activity). In contrast, its impact through the wealth effect may be particularly effective, but will run into financial stability concerns and could thus trigger offsetting policy steps such as tighter macro-prudential policy.

"Should a funding or liquidity event occur, we’d expect the RBA to accompany bond purchases with a policy, such as LTROs or a lending facility, to directly lower bank funding costs and encourage lending," ANZ research further commented in the report.