Receive the latest mybusiness news
Copyright © 2020 MOMENTUMMEDIA

RBA considering ‘radical’ stimulus: Economist

Adam Zuchetti
Adam Zuchetti
17 June 2019 3 minute readShare

An economist has poured cold water on the idea of the Reserve Bank resorting to so-called “helicopter money” or cash payments to stimulate the economy, but suggested other “radical” stimulus measures are being considered.

Speaking recently at a media briefing in conjunction with Seek, ahead of the release of latest job ads figures, NAB economist Kieran Davies — fresh from a stint working in the federal Treasury — suggested that further interest rate cuts are likely, with the prospect of more “radical” stimulus measures by early 2020.

More rate cuts to come

“We think that they [the RBA] will cut again by August,” he said of interest rates.

“Then we think that there’s a risk that they might deliver a third cut or do something a bit more radical by early next year, effectively just to ensure that they can get the economy strong enough to get inflation and wages back up.”

According to Mr Davies, the RBA will likely shy away from following the lead of other countries in taking official interest rates to zero.

“They’ve said before that 1 per cent plus or minus a bit is what they think is the lowest they could go,” he said.

“But other countries have gone to zero — some countries have gone to negative interest rates. Hopefully, it won’t come to that.”

No cash payments to taxpayers

According to Mr Davies, other more “radical” measures we could potentially see from the central bank are a bond-buying scheme used to reduce the cost of lending, as well as moves to “squeeze out” foreign investors from the Australian economy in order to lower the exchange rate.

However, Mr Davies said that “helicopter money” — including freshly minted money being issued as cash payments into the bank accounts of Australian taxpayers — is highly unlikely, despite the measure being employed here in Australia in 2009 by the Rudd government as part of its efforts as the global financial crisis hit hard.

“It generally does work, but it’s often hard to stop,” he said, suggesting that such a measure is usually used in developing countries.

“The governments get used to the idea of just having no constraints on the budget; they’ve started spending money, they know that the central bank is going to pay for it by issuing more bank notes, and so it’s hard [to stop].

“As the Reserve Bank put it, it becomes addictive for politicians.”

He added that cash payments to taxpayers would likely be a measure of last resort, having exhausted “a lot of other options before they got to that point”.

Mr Davies suggested that the same economic boost could be delivered from other forms of government stimulus, as well as the RBA buying government bonds to keep banks lending at affordable rates.

Government urged to do more

Meanwhile, he suggested that “the government’s got a windfall coming through from company tax”, which it could use to help stimulate the economy alongside the efforts of the RBA.

“The budget is probably in better shape than you might think, given the state of the economy.”

Mr Davies noted that the government promised tax cuts, done as a tax offset for this year’s refund, in the April budget, although these are still yet to be legislated by parliament.

“They will be helpful for the Reserve Bank, but you’ve had the governor of the Reserve Bank out there calling for more action, and so I think it would be good at some stage if the government did actually think about having some fiscal stimulus,” he said.

Regardless of what form stimulus measures may take, Mr Davies painted a fairly grim picture of the nation’s economy. He pointed to:

  • a domestically driven slowdown at a time when world trade is also slowing, largely due to the US–China trade war.
  • business conditions at their lowest levels since 2015.
  • effectively zero growth in household incomes for the last five years.
  • sluggish wage growth by Australia’s historical standards. “The fact that wage growth is so low is telling you that there’s still a lot of spare capacity in the economy,” Mr Davies said. “A lot of [employed Australians] actually want to work more hours... about one in 10 workers would actually want a full-time job rather than the part-time job they are working.”
  • unemployment edging higher.
  • inflation now in its fourth year of running below target.

The comments from Mr Davies came after the Reserve Bank cut official interest rates on 4 June — the first movement in either direction since August 2016.

This email address is being protected from spambots. You need JavaScript enabled to view it.

RBA considering ‘radical’ stimulus: Economist
mybusiness logo
Adam Zuchetti
Adam Zuchetti

Adam Zuchetti is the former editor of MyBusiness and a senior freelance media professional, specialising in the fields of business, personal finance and property. In 2020, he also embarked on his own business journey – inspired in part by the entrepreneurs and founders he had met through his journalistic work – with the launch of customised pet gifting and subscription service Paws N’ All.

Leave a Comment

Latest poll

How satisfied are you with the SME measures in the federal budget?