Canberra: Australian central bank assistant governor Chris Kent said the institution will be better prepared to respond to the next crisis it faces following a review of alternative monetary policy tools.
“The cash rate target remains our primary and preferred instrument,” Kent, who oversees financial markets at the Reserve Bank of Australia (RBA), said yesterday,
“Additional tools can play an important role during extraordinary times and provide some extra support, but they are more complex and carry greater risks.”
During the pandemic, the RBA cut its cash rate to 0.1% and implemented a yield target, together with a bond-buying programme.
Then-governor Philip Lowe also provided time-based forward guidance that created difficulties when inflation surged after the end of Covid.
Kent was speaking about the Monetary Policy Board’s new Framework for Additional Monetary Policy Tools at low interest rates published alongside his speech.
He highlighted when rates are already low, the board may have less tolerance for inflation falling below the 2% to 3% target.
“In those circumstances, it may consider responding earlier and more decisively to disinflationary shocks by pre-emptively lowering the cash rate target,” he said.
“In short, the most important support during the pandemic came from lowering the cash rate to historically low levels and keeping it there,” Kent said.
“Additional tools can reinforce that support, but their effects – beyond addressing severe market strains – are likely to be more marginal and their risks need to be managed carefully.”
Asked how frequently the tools might be used, given developed central banks tend to cut rates by about 400 basis points during a recession and the neutral rate is around 3.6%, Kent reiterated that the RBA might need to bring in additional support from its policy toolkit.
The RBA slipped into negative equity following its quantitative easing programme during the pandemic and as a result, has been unable to pay the government a dividend.
Kent was asked whether the government could provide more support to cover losses from bond purchases in times of crisis.
The assistant governor said the RBA opted against doing so last time to ensure its independence and to be seen by the market as being “at arm’s length” from the government by purchasing in the secondary market. — Bloomberg
