By Duncan Murray
SYDNEY, June 2 (Xinhua) -- With Australia's interest rate at a record low of 0.25 percent and the world in the grips of economic hardship, this week the question was raised -- should Australia join the string of countries with an interest rate below zero?
On Monday, Chief Economist at Westpac Bank Bill Evans urged the board of the Reserve Bank of Australia (RBA) to consider a negative interest rate to give the country an economic boost, despite the RBA declaring 0.25 percent to be the "effective lower boundary" for its policy rate.
"A serious case can be made for the RBA to consider further cuts and entering negative territory for the cash rate if it becomes apparent that the economy is deteriorating even more than is currently expected," Evans said.
In theory, negative interest rates work by prompting more people and institutions to borrow money, and handicap those who keep their funds in the bank, ideally generating enough investment in money-making ventures to kick start the economy.
However, Governor of the RBA Philip Lowe has repeatedly downplayed the policy for Australia, describing it as "extraordinarily unlikely."
Demonstrating a commitment to that stance, on Tuesday the RBA moved to keep the interest rate on hold at 0.25 percent following its June monthly meeting, as was expected by most observers.
Evans is not the only high profile economist in Australia who believes the country is on a path to zero. On Monday, RBC Capital Chief Economist Su-Lin Ong also stated there was a real possibility of a negative interest rate for Australia within the next year, despite the RBA governor's insistence otherwise.
Both Evans and Ong believe that the RBA's position could change, particularly if the COVID-19 crisis deepens or if other major economies such as the United States and Britain adopt the policy, as has been speculated.
"In the event of another shock, including a significant second wave of COVID-19 domestically or globally, and/or central banks that increasingly adopt a negative cash rate stance, pressure will mount on the RBA to bring negative rates onto its agenda," Ong told the Australian Financial Review.
Now, according to RBA forecasts, Australia's economy is set to contract by 10 percent in the June quarter and unemployment is expected to remain elevated until as late as mid-2022.
Evans believes that a negative interest rate, if properly implemented could help the RBA to meet their own ambitious targets by lifting employment and stabilising inflation.
He added that an overwhelming advantage for a small and open economy like Australia, was to drive down the local currency, which on Monday topped 68 U.S. cents, it's highest level since late-February.
"When I look at the overall outlook and the costs and the benefits of adopting that negative rate policy, I have to believe that as things evolve over the next few years ... the option of negative rates is likely to come back on to the policy agenda," Evans said. Enditem
