Looking ahead at the policy outlook for 2020, a number of uncertainties remain.
At the November board meeting, the Reserve Bank board kept rates on hold at 0.75 per cent as expected. However, the quarterly Statement on Monetary Policy (SMP) released the week before provided the most open analysis of policy options that we have seen.
In particular, it included the important note that “the board was mindful that rates were already very low and that each further cut brings closer the point at which other policy options come into play”.
While it’s quite ambiguous whether they’re talking about other forms of monetary policy or fiscal policy or both. I suspect it’s the latter.
We continue to expect a cut in the cash rate to 0.5 per cent in February. As recent disappointing retail sales, wages and employment prints have confirmed, the economy is waning and we have argued since July that the “effective lower bound” (ELB) of the cash rate will prove to be 0.5 per cent.
After reaching that in February, we expect the RBA will move into a phase of unconventional policy that will mainly take the form of purchasing government bonds and potentially other assets, such as residential mortgage backed securities.
But as I’ve previously said, I think the real solution is to use fiscal policy to boost economy.
In particular, the federal government could accelerate the second stage of personal income tax cuts already legislated for July 2022 and costing about $14bn a year. If they brought them forward in two tranches, we estimate they could still deliver a budget surplus in 2019-20 while delivering greater stimulus to the economy than is likely to be able to be provided by unconventional monetary policy.
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