In recent months, ongoing rate cuts by the Reserve Bank of Australia (RBA) have brought the official cash rate down to an historic low. This trend, coupled with uncertainty about the future of the domestic and global economy, has some commentators speculating whether Australia will ever see negative interest rates.
What are negative interest rates and why would they happen?
The RBA sets the official cash rate, which is the interest rate on overnight loans given to banks.
Although banks and non-bank lenders aren’t required to pass rate drops or rises to their customers, they often do. That’s why a drop in the official cash rate usually spells a drop in interest rates on home loans.
If the RBA were to set the cash rate below 0%, it would drive interest rates into negative territory as well. This would mean consumers would earn interest for taking out a home loan or other loan, while paying interest to banks for holding their money, such as in a savings account.
Several central banks, including those of Japan, Denmark, Sweden and Switzerland, have implemented negative interest rates.
Theoretically, negative interest rates boost the economy by encouraging consumers to take their money out of deposit accounts to spend or invest it. But, unsurprisingly, having to pay a bank to hold money is an unappealing prospect for many consumers.
Will we see negative interest rates in Australia?
The RBA has said that negative interest rates in Australia are “extraordinarily unlikely” but hasn’t ruled them out. In a recent statement, RBA governor Philip Lowe noted “it is reasonable to expect that an extended period of low interest rates will be required in Australia.”
He also said that the RBA “remains prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.”
This is in part a response to a continuing trend of weak household spending and investment, as well as the more recent economic instability surrounding the bushfires and the coronavirus.
So while interest rates may not fall into negative territory any time soon, they’re likely to remain low for the foreseeable future.
Other unconventional measures are a possibility
Aside from negative interest rates, the RBA could look to implement other policies designed to spur economic growth.
In a November 2019 speech, Dr Lowe discussed the potential for introducing a number of unconventional monetary policies:
- Quantitative easing (QE), which is a policy under which a central bank buys government bonds or other financial assets to inject liquidity into the economy. This tactic has been used by Japan, the EU and the United States.
- Forward guidance, which is where a central bank provides information about its future monetary policy intentions, such as making a commitment not to increase interest rates until a certain point in time.
- Extended liquidity options, which involves changing normal market operations to deal with financial strain. This could include increasing lending to banks, lending for longer periods or lending at discounted interest rates.
Whether negative interest rates or other unconventional monetary policies come into play remains to be seen. The outcome will depend on factors like future domestic and international economic growth, inflation and the employment rate.