New framework guides additional monetary tools at low rates

Reserve Bank of Australia Assistant Governor Christopher Kent presented a new framework for additional monetary tools at low interest rates, informed by experts including Loretta Mester.

The framework relies on four principles: advancing policy objectives, balancing costs against benefits, maintaining flexibility, and consulting Treasury and APRA.

Reflecting on pandemic measures, Kent noted substantial balance sheet impacts, including a 9 billion Australian dollar cost from the Term Funding Facility and 30 billion Australian dollars from bond purchases.

While initial 2020 bond purchases of 40 billion Australian dollars restored market functioning, prolonged programs proved less effective in Australia's bank-focused system.

The cash rate target remains the central bank's primary tool, but the framework sets clear parameters for future low-rate episodes, emphasizing pre-emptive rate cuts and early exit planning.

Kent noted that unconventional options like negative interest rates or foreign exchange asset purchases remain in the toolkit, though they would only be considered in truly exceptional circumstances due to financial and operational risks.

Next steps include conducting fire-drills with the Monetary Policy Board, Governance Board, and staff to test decision-making under time pressure.