The Reserve Bank Governor Dr Phillip Lowe was answering questions after his address to the House of Representatives Standing Committee on Economics last Friday 14 August and effectively ruled out negative interest rates in Australia.
The cash rate is at an all-time low of 0.25% and there have been debates whether the RBA should be doing more to boost the economy. Questions have also been asked whether the monetary policy measures have been exhausted to which Dr Lowe stated that there are limits to what the RBA can reasonably do.
Dr Lowe was asked that against the inflation mandate of 2-3% and given that it has trended below that level since 2016 and unemployment at higher the normal rate, is the RBA taking enough policy measure to address the issue including negative interest rates. Dr Lowe stated that having negative interest rate in the current uncertainty around pandemic affected Australian economy is "extraordinarily unlikely". He cited the impairment to profitability and efficiency of the financial system as a negative to having a cash rate below zero. It is a fact that the European banking system is currently under significant pressure of structurally low profits. Further, the distortion it creates to the deposit rates is also a negative as the trend is that if by depositing money if a depositor gets back less in future, the depositors effectively do not deposit the money and that affects credit supply. Dr Lowe also stated that none of the Central Banks around the world lowered the cash rate to negative and those with negative rates have gone more negative due to COVID-19. Dr Lowe also stated that a lowering of the cash rate to 0.10-0.20% was possible but he doubted if that would yield any benefits as regards the mandated target bands.
The cash rate is at an all-time low of 0.25% and there have been debates whether the RBA should be doing more to boost the economy. Questions have also been asked whether the monetary policy measures have been exhausted to which Dr Lowe stated that there are limits to what the RBA can reasonably do.
Dr Lowe was asked that against the inflation mandate of 2-3% and given that it has trended below that level since 2016 and unemployment at higher the normal rate, is the RBA taking enough policy measure to address the issue including negative interest rates. Dr Lowe stated that having negative interest rate in the current uncertainty around pandemic affected Australian economy is "extraordinarily unlikely". He cited the impairment to profitability and efficiency of the financial system as a negative to having a cash rate below zero. It is a fact that the European banking system is currently under significant pressure of structurally low profits. Further, the distortion it creates to the deposit rates is also a negative as the trend is that if by depositing money if a depositor gets back less in future, the depositors effectively do not deposit the money and that affects credit supply. Dr Lowe also stated that none of the Central Banks around the world lowered the cash rate to negative and those with negative rates have gone more negative due to COVID-19. Dr Lowe also stated that a lowering of the cash rate to 0.10-0.20% was possible but he doubted if that would yield any benefits as regards the mandated target bands.
a sudden hiccup to the gold march
5 years ago spot gold was at USD 1160 AND ON 21 May 2019, it was USD 1274. On 17 Mar 2020 gold fell slightly when the world started shutting down and lockdowns affected global economy due to COVID-19. Even on that day, the gold price was USD 1497. With US economy affected by the pandemic and with rising unemployment, gold found favour as the safe harbour currency for investors and its march began. Price of gold jumped to USD 2,075 on 7 August 2020, a staggering 38% rise in 4 ½ months. Gold fell to USD 1,863 or by 10%. The sell off which normally is associated by a Central Bank rate move was markedly absent this time which caught the traders by surprise.
It appears that a correction has taken place to the price of gold. The moving 50 day average is about USD 1,830 and the 200 day moving average is USD 1,650. We still believe that due to the uncertaintly in COVID-19 affected world, the future for gold remains positive. Investors are not flocking to the stock markets and have liuquid cash and gold continues to remain a safe harbour asset to park funds for the time being.
It appears that a correction has taken place to the price of gold. The moving 50 day average is about USD 1,830 and the 200 day moving average is USD 1,650. We still believe that due to the uncertaintly in COVID-19 affected world, the future for gold remains positive. Investors are not flocking to the stock markets and have liuquid cash and gold continues to remain a safe harbour asset to park funds for the time being.
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