September 24, 2019

Australian Markets Weekly: unconventional monetary policy nears

The Government pushes for greater transparency as unconventional monetary policy nears.

For the full picture, download the report – Australian Markets Weekly 23 September 2019


  • Governor Lowe has repeatedly called for fiscal stimulus to help support the economy, but so far the government has remained focused on delivering a surplus. The treasurer has dismissed reports of friction between the governor and government over fiscal policy, but we wonder if it is having a bearing on the time being taken to finalise the Statement on the Conduct of Monetary Policy, which outlines the common understanding between the Reserve Bank and government on policy.
  • The treasurer reportedly plans to require the governor to write a Bank of England-style letter of explanation if the bank misses the inflation target, which at the margin would add to the pressure to cut rates.  It is unclear whether increased accountability would extend to unconventional policy, which is also in the Bank of England’s remit and which we think could be implemented next year unless meaningful fiscal stimulus is forthcoming from the government.
  • For his part, Lowe has suggested the Reserve Bank would draw together a package of unconventional policy if the cash reached around 0.5%.  Adapting work by the Fed, we estimate that the probability of the cash rate reaching this level has increased from 4% prior to the global financial crisis to 25% on our estimate of a 3.25% neutral cash rate. None of this would be news to the bank, but it is not obvious that the government appreciates these risks, which means that the bank would have a greater burden in supporting the economy even though the government is better placed given the low level of public debt and record low borrowing costs.

The week ahead – RBA speech; RBNZ on hold; US consumer spending; EZ PMIs

  • On Tuesday night, Governor Lowe will deliver “An economic update”, where we expect he will signal an October rate cut (we now expect an October easing and a follow-up cut in December). Given the regional location we expect Lowe to highlight the damage from the ongoing drought and the risks from the US-China trade war. While wary of the RBNZ’s ability to surprise, we think it will hold the cash rate at 1% at Wednesday’s OCR Review.
  • In the US, August personal spending and the PCE deflators are released on Friday, with spending set to rise further. Also out Friday are durables goods orders, which should provide insight on whether the escalation in trade tensions in August saw more businesses defer investment decisions. Orders likely weakened, in stark contrast to strong consumption. In the euro area, flash September manufacturing and service sector PMIs are expected to show a further stabilisation in manufacturing conditions offset by ongoing resilience in the service sector.

Customers can receive Australian Markets Weekly and other updates directly in their inbox by emailing with the name of their NAB relationship manager.