(Bloomberg) -- Australia’s back-to-back interest-rate cuts are helping check the currency, Reserve Bank official Christopher Kent said, while quantitative easing is still “pretty unlikely” even as traditional policy ammunition wanes.
In a response to questions after a speech at Bloomberg’s Sydney headquarters on Tuesday, Assistant Governor Kent said the exchange rate transmission from rate cuts has been “broadly working as you would expect.” The Australian dollar is being supported by “a welcome” increase in commodity prices and other major banks turning dovish.
“That doesn’t mean the reductions in the cash rate here have not had their effect on the exchange rate in the normal way, it’s just that there have been other forces,” said Kent, who oversees financial markets. “You could say well, absent reductions in the cash rate, the Aussie dollar might have been higher.”
The RBA cut interest rates to a fresh record low of 1% this month as it tries to reinvigorate a slowing economy. While policy makers acknowledge the impact of easing diminishes as interest rates moves lower, they maintain it still supports growth by giving more money to mortgage holders and via the exchange rate, which should weaken if other factors determining its level were held equal.
In the past month, the currency has risen about 1.5% against the U.S. dollar. The price of iron ore, Australia’s biggest export, surged more than 60% this year, and bets have firmed on the Federal Reserve and European Central Bank providing more stimulus to their economies. The Fed is expected to cut rates for the first time in a decade later this month.
Traders are pricing in about a 70% chance of the RBA cutting rates by another quarter percentage point by year’s end.
With Australia’s cash rate at 1% -- the same level as the Fed’s when it began QE -- talk of the RBA turning to unconventional monetary policy has increased. Kent today repeated the central bank’s mantra of recent times: “we’re a long way away from something like that,” he said. But he also made clear policy makers aren’t burying their heads in the sand.
“It’s prudent for us as good central bankers to be thinking about these things, and what we’ve been doing of course is looking at what others have done, and their experience and what we can learn from that,” Kent said. “In most cases these were policies that were started in the depths of the financial crisis when the credit system was quite impaired. That’s not the sort of thing I think people have at the back of their minds here.”
He said tailoring policies to “your own economic circumstances” and “the unique circumstances of your financial system” were important lessons the bank had drawn.
Across the Tasman, New Zealand’s central bank is taking another look at its strategy for unconventional monetary policy as its official cash rate looks set to plumb fresh record lows. “This year the Reserve Bank has begun scoping a project to refresh our unconventional monetary policy strategy and implementation. This is at a very early stage,” the RBNZ said in response to an Official Information Act request for work on non-standard policy measures.
Kent earlier delivered a speech that fleshed out the RBA thinking behind adjustments to its guaranteed source of liquidity to banks. This in part reflects changes in Australia’s bond market, where the number of “buy and hold” offshore investors has declined in recent years.
The central bank estimates lenders can lift holdings of local bonds and pay more to use the facility. Changes were announced in June and start next year. The facility was set up to help banks comply with international safeguards brought in after the 2008-9 financial crisis.
The move comes as foreign central banks’ holdings of Australian general government debt appear to have peaked as a proportion of the market. Central banks held $174 billion of Australian dollar assets at the end of last year, International Monetary Fund data show. That’s 27.8% of the total general government debt on issue as tracked by the Bank for International Settlements, down from 28.6% at the end of the third quarter of 2018.
