The RBA wants rates to go to negative one percent.
They’re currently at a record low of
0.75%. That’s low. It’s like crazy low.
But they want them to go even lower. They need them to go even lower.
I don’t
think we’re actually going there, because it’s not physically possible. Think about it. The bank would be paying you to
borrow money.
But it says a lot about where we’re at right now.
Anyway, this all comes from their
model. Think of it like a robot – a robot called MARTIN.
Anyway, MARTIN is a very complex machine. He takes data from all over the economy, crunches it all together, and
then gives the RBA an opinion about what interest rates should be.
And what happened the last time they got together and asked MARTIN what interest rates should be?
MARTIN
told them that rates should be -1%.
What?!?
They checked their inputs. Checked that the work-experience kid had been using
MARTIN to watch porn or something. But nope. MARTIN gave them the same result again.
That’s
the word from Goldman Sach’s insider:
“Most strikingly, MARTIN suggests the RBA would need to implement a minus 1 per cent cash rate if it wants to
achieve its unemployment and inflation goals over its 2-3 year forecast horizon.
Assuming the RBA refrains from implementing negative rates, we estimate an equivalent amount of stimulus could be
delivered by lowering rates to their effective lower bound (0 to 0.25pc) and implementing a QE program worth around
$200bn.
…We continue to see a material risk that the RBA will deliver even deeper rate cuts and be drawn into
unconventional policies .For now, however, this remains outside our central scenario given Governor Lowe’s concerns
about financial stability risks from loose monetary policy.
…This provides a material tailwind to consumption and dwelling investment over the next few years, although it
comes at the expense of a significant increase in households’ debt-to-income ratio.
…The impact of stimulus on other channels, including the exchange rate, is projected to be fairly muted.
That
is a pretty large number, roughly equivalent to the US Fed’s QE1 and QE2 relative to GDP.”
And this is where things start to get really interesting. Interest rates can’t go below zero. Most people
think they can’t go below 0.5% in Australia, and we’re almost there already.
After that, we’ve got to go to ‘unconventional policies”. That’s a polite term for “massive money printing” the
likes of which we saw in the US after the GFC.
And the likes of which light a massive fire under asset prices, particularly property.
