By James Glynn
SYDNEY--The Reserve Bank of Australia has scope to ease monetary policy settings further if it wants, and any suggestion that its firepower has run out can be dismissed, Ian Harper, a member of the central bank's policy-setting board, told the Wall Street Journal.
"There is certainly capacity for the Reserve Bank to do some more if the board judges that that is appropriate. This idea that the bank has run out of ammunition is false," he said.
Mr. Harper, who wasn't speaking on behalf of the RBA, said that while it is true there is little scope to lower the official cash rate further from its current record low of 0.25% and the option of negative interest rates remains extraordinarily unlikely, the RBA still has the option of quantitative easing.
"The bank can purchase more government securities at different points on the yield curve. It can do more to manage the yield curve than it has currently done," said Mr. Harper, who is also dean of Melbourne Business School. "It can also make more noises and commitment to the outlook for interest rates."
As a further weapon, the RBA has scope to ramp up buying of government bonds almost indefinitely, Mr. Harper added.
The comments come ahead of the RBA's monthly policy meeting Tuesday, with markets betting big that Gov. Philip Lowe will announce a number of measures to further stimulate the economy, among them QE targeting lower five-year and 10-year government bond yields.
The RBA has grown concerned that in the absence of a concerted QE program in Australia, government bond yields will rise above their global counterparts, putting upward pressure on the Australian dollar, potentially slowing economic recovery.
Mr. Harper's predecessor on the RBA board, economist John Edwards, told the Wall Street Journal last week that QE was an obvious choice for the central bank and that it would directly benefit the recovery.
With the economy now showing signs of recovery after GDP growth cratered by 7.0% in the second quarter, further easing of the policy reins would be more likely to gain traction and spur business activity, Mr. Harper said.
"As the supply-side restrictions are removed you would expect demand side stimulus, whether it is fiscal or monetary, to have a greater impact," Mr. Harper said.
Still, while it is technically possible to move to negative interest rates, this would probably be a disaster as consumers would be more likely to pull savings out of bank accounts and hoard it, he added.
"The last thing we want to do is to signal rates are going negative in which case people would get their cash and put it under the bed," he said.
Mr. Harper is upbeat on the economic outlook and forecasts a V-shaped recovery as virus-related restrictions on business and personal movement are lifted.
He said he is confident that unemployment won't rise above 9%, a level much lower than some of the estimates first floated in March and April, and below the peak of 11% when the economy last sank into recession in the early 1990s.
Unemployment won't remain near 9% for long "because we are expecting the recovery to be quite strong," he added.
"Nobody has a crystal ball but you'd have to say that we are in the strongest possible position to recover quickly," he said.
Mr. Harper also rejected recent criticism of the RBA by a former staff member that its internal decision-making processes are flawed and that the board is overweight with people who aren't economists.
"We have a board that does not understand monetary policy or statistical research," former RBA researcher Peter Tulip reportedly said.
Mr. Harper said the assertions are "wholly uniformed," noting the central bank leaves no stone unturned when examining the economic debate from all angles. The idea that the RBA should lean more heavily on economic modeling was "completely naive," he added.
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