The Reserve Bank of Australia (RBA) dismissed the possibility of a negative interest rate scenario, stating that the country remained in a strong position.
Negative rates in Australia are "extremely improbable," said RBA Governor Philip Lowe during a speech at the dinner of Australian business economists in Sydney.
Negative rate policy is a trend commonly observed in European countries, including Denmark, Sweden and Switzerland. Outside the European region, only Japan has attempted to go beyond zero rates.
"We are not in the same situation as in Europe and Japan. Our growth prospects are better, our banking system is doing much better, our demographic profile is better, and we have not had a period of deflation. So we are in a much stronger position, "he said.
Lowe said that it was not clear if the experiment with negative rates had been successful.
Read also: What happens if the interest rate reduces real estate prices, but nothing else?
"It has become increasingly clear that negative rates create tension in some parts of the banking system that can affect the ability of some banks to provide credit. Negative interest rates also create problems for pension funds that have to finance their long-term liabilities, "he said.
In addition, Lowe said that negative rates could encourage households to save more and spend less, which would make the population more cautious.
The rate of interest must remain low
The central bank reduced the official exchange rate three times this year to 0.75% in October. Although Lowe rejected the negative rates, he did not rule out further rate cuts in the future. However, he said that the economy is now benefiting from the effects of recent rate cuts, taxes and rising real estate prices.
"The board is also committed to keeping interest rates low until it is convinced that inflation is in the long run. target range of 2 to 3%, "he said.
The RBA expects the Australian economy to grow by 3% in 2021.
"This acceleration of growth should lead to a reduction in the unemployment rate and an increase in inflation. So we expect things to move in the right direction, even if it's only gradually, "Lowe said.
Market watchers expect interest rate cuts to reach 0.25% next year. At this point, the RBA could consider doing quantitative easing.
"The threshold for undertaking QE in Australia has not been met, and I'm not expecting it to be achieved in the near future," Lowe said.
However, he stated that under certain circumstances, an EQ would be useful.
"International experience shows us that in difficult market conditions, the central bank can help stabilize the situation by buying government securities. This experience also suggests that QE is putting additional downward pressure on interest rates and the exchange rate, "said Lowe. "In examining the case for QE, we should balance these positive effects with possible side effects."
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