With its official cash rate now expected to fall below 1% to a new extraordinarily low close to zero, all sorts of people are saying that the Reserve Bank is in danger of “running out of ammunition.” Ammunition might be needed if, as during the last financial crisis, it needs to cut rates by several percentage points.
This view assumes that when the cash rate hits zero there is nothing more the Reserve Bank can do.
The view is not only wrong, it is also dangerous, because if taken seriously it would mean that all of the next rounds of stimulus would have to be come from fiscal (spending and tax) policy, even though fiscal policy is probably ineffective long-term, its effects being neutralised by a floating exchange rate.
The experience of the United States shows that Australia’s Reserve Bank could quite easily take measures that would have the same effect as cutting its cash rate a further 2.5 percentage points – that is: 2.5 percentage points below zero.
Reserve Bank cash rate since 1990
- ^ running out of ammunition. (www.reuters.com)
- ^ neutralised by a floating exchange rate (www.mercatus.org)
- ^ Reserve Bank of Australia (www.rba.gov.au)
- ^ released on Tuesday (www.ussc.edu.au)
- ^ University of Sydney United States Studies Centre (www.ussc.edu.au)
- ^ forward guidance (www.federalreserve.gov)
- ^ The Reserve Bank will cut rates again and again, until we lift spending and push up prices (theconversation.com)
- ^ a further 2.5 percentage points (www.ussc.edu.au)
- ^ suggested (www.abc.net.au)
- ^ by no means certain (www.rba.gov.au)
- ^ Scott Sumner (www.mercatus.org)
- ^ help from the government itself (www.rba.gov.au)
- ^ Vital Signs. If we fall into a recession (and we might) we'll have ourselves to blame (theconversation.com)
- ^ Joe Hockey (www.afr.com)
- ^ millennial socialism (realconservativesunite.com)
Authors: Stephen Kirchner, Program Director, Trade and Investment, United States Studies Centre, University of Sydney