For the full picture, download the report: Australian Markets Weekly 25 November 2019

• The effective lower bound for the policy rate is negative, but the Reserve Bank only seems comfortable with a 0.25-0.5% floor for the cash rate.  However, the decline in the neutral cash rate from 3.5% in 2017 to around 3% points to a roughly 25% risk that policy breaches this 0.25-0.5% range based on the past distribution of the cash rate, which would put unconventional policy on the table.
• Governor Lowe is speaking on unconventional policy this week, but our joint work with NAB strategists suggests that cutting the cash rate as low as 0.25% is unlikely to achieve the Reserve Bank’s goal of achieving full employment.  Making some strong assumptions, we estimate that buying $115bn of government bonds – or 6% of GDP –   could meet this target, although there is much uncertainty around this estimate.
• Our strategist colleagues point out that the Reserve Bank would find it difficult to quickly amass this many bonds, such that in this scenario the bank would have to consider other unconventional options and/or the government needs to deliver an additional fiscal stimulus.

The week ahead – RBA’s Lowe & Debelle speak; AU GDP partials; RBNZ FSR; Fed’s Powell

• Governor Lowe speaks Tuesday on “Unconventional monetary policy – some lessons from overseas”. Lowe is likely to deliver the RBA’s assessment of unconventional policy options and possibly outline the conditions that would warrant such a programme. Deputy Governor Debelle speaks the same day on “Employment and wages”.  For the GDP partials, NAB forecasts a 1.5% fall in construction work done (mkt: -1.0%), led by a 3.5% fall in residential construction and a 1% fall in equipment investment. In NZ, there is likely solid Q3 retail trade (Tuesday), the RBNZ Financial Stability Report (Wednesday), the ANZ business survey (Thursday), and the inaugural release of monthly employment data (Thursday).
• Globally, markets wait for news on a possible US-China trade deal. Fed Chair Powell speaks on Monday, his first speech since meeting with President Trump, where Trump protested against “too high” rates. Personal spending is due Wednesday, where annual core PCE inflation should remain subdued at 1.4%.

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