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BILL'S BITES: Policy outlook for 2020

12:38pm November 21 2019

Westpac chief economist Bill Evans discusses the policy outlook. (Josh Wall)

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.  

This material contains general commentary, and market colour. This material does not constitute investment advice. This information has been prepared without taking account of your objectives, financial situation or needs. We recommend that you seek your own independent legal or financial advice before proceeding with any investment decision. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts. Except where contrary to law, Westpac and its related entities intend by this notice to exclude liability for this information.

William (Bill) Evans is Westpac’s economic spokesman and is responsible for all of our economic research. In 1991, Bill joined Westpac as the Chief Economist and Head of Research. A graduate of Sydney University (BEc. Hons I and University Medal) and the London School of Economics (M. Sc.), Bill has worked as Research Manager for the Reserve Bank of Australia and as a Treasurer at the Commonwealth Bank of Australia. Bill travels frequently, advising Westpac’s customers on the Australian economy and financial markets.

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