Reserve Bank may resort to more rate cuts and 'even quantitative easing'

The Reserve Bank of Australia could be forced to cut the cash rate to 1% in the next 12 months and even resort to US and European-style monetary easing if global headwinds continue to weigh on the economy, experts have warned.

Despite already cutting the rate twice in 2016 to unprecedented levels, the central bank faces a scenario where a deteriorating economic outlook brings at least two more reductions.

After that the bank might have to resort to quantitative easing – the unconventional monetary policy of printing money to buy up government bonds used by central banks in the US, Japan, UK and Europe in response to the global financial crisis, National Australia Bank economists warned on Tuesday.

Releasing its monthly business survey on Tuesday, NAB said that the short-term outlook was upbeat but longer-term risks for Australia were becoming more apparent as resources exports levelled off and housing construction slowed.

The chief economist at NAB, Alan Oster, said: “Against these headwinds, the economy may require additional policy action to support growth, especially if the RBA hopes to see inflation return to within its 2-3% target band.

“Both global and domestic disinflationary pressures are expected to keep inflation below the target band for an extended period, while structural shifts in the economy and modest economic growth risk upward pressure on the unemployment rate.

“We now expect the RBA will need to provide further support through two more [quarter percentage point] cuts in May and August 2017 [to a new low of 1%], which should be enough to stabilise the unemployment rate at just over 5.5% and prevent economic growth from dropping below our forecast of 2.6% in 2018.

“And thereafter raises the prospect of the RBA thinking about the use of non-conventional monetary policy measures.”

The NAB monthly business survey showed that the confidence index eased slightly to +4 index points in July (from +5), which is below the average of +6. Business conditions dropped back as well in July, to +8 index points (from +11), but this was still well above the long run average of +5.

The difficulties facing the Australian economy were underlined by a survey showing consumers’ growing pessimism about the short-term economic outlook has pushed confidence to its lowest level in nine weeks.

Consumer confidence fell 2.8% in the week ending 7 August, erasing two weeks of gains, according to the ANZ-Roy Morgan weekly consumer confidence survey published on Tuesday. However, it remains above the long-term average.

ANZ’s head of Australian economics, Felicity Emmett, said the sharp fall was disappointing in the same week the RBA cut its cash rate to a historic low of 1.5%.

“The weakness in confidence is more pronounced in the near-term economic outlook – possibly reflecting some concerns over the health of the global economy,” said Emmett, adding that the ANZ uncertainty index was at its highest level since the euro area debt crisis in 2011.