In a speech at the Citi Australia and New Zealand Annual Investment Conference earlier today, Reserve Bank of Australia (RBA) Governor Philip Lowe highlighted three main issues that the central bank is currently working on before they have a clearer picture of whether or not they should carry out the easing measures (including a further cut in interest rate) mentioned by the Deputy Governor Debelle last month.
(1) How much better is it for the Australian economy?
Governor Lowe explained that during the worst period of the pandemic when lockdown measures were in place, further monetary easing will yield little benefits since not much economic activities were carried out. Whereas now that the economy is opening up, it makes more sense to consider further monetary easing.
(2) Effects of further monetary easing on financial stability and longer-term macroeconomic stability.
Monetary easing can help increase employment and reduce the chance of loan defaults, thus decreasing financial stability risks. However, the trade-off for this is the increase of additional risks as a result of people taking up more investment risk while searching for gains. Furthermore, a cut in interest rates will affect people who are dependent on interest income.
(3) International monetary policy
Since the Australian economy is interconnected with the economies from other countries, it is necessary for the RBA to also consider what stance of monetary policy the other central banks are taking.
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