Government warned not to waste surplus while markets call RBA’s bluff on QE


S&P said while the Reserve Bank had sliced official interest rates in recent months to support the economy, a substantial increase in government spending would hurt the nation’s credit standing.

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“As the official cash rate in Australia moves toward zero there have been growing calls for the government to increase fiscal stimulus, including infrastructure spending, to stimulate and support the slowing economy,” it said.

“If this fiscal stimulus involves substantial spending initiatives and changes the trajectory of the budget, then doing so could increase downward pressure on our rating and outlook for Australia.

“While spending initiatives are likely to support the economy, they’re also likely to weaken Australia’s fiscal flexibility to respond to future unforeseen economic shocks.”

Mr Morrison said S&P was making it clear the government should not be panicked into stimulus programs that would hurt the budget bottom line.

He said the government’s existing infrastructure program, recent tax cuts, extra spending in defence and its response to the drought were all supporting the economy.

“What our government is doing is investing in our economy and guaranteeing the essentials that
Australians rely on from a position of fiscal and financial strength,” he said.

RBA governor Philip Lowe has said the bank will not engage in unconventional monetary policies until the official cash rate is at 0.25 per cent.Credit:AAP

The agency made its comments after Reserve Bank governor Philip Lowe downplayed expectations the institution would be forced into unconventional measures such as negative interest rates or the purchase of government debt, saying such a move would only be considered if official interest rates reached 0.25 per cent.

The bank has taken the cash rate down to 0.75 per cent with markets now expecting it be cut again by May next year. The same markets put the chance of a 0.25 per cent cash rate next year at 70 per cent.

Construction figures from the Australian Bureau of Statistics on Wednesday showed work falling by 0.4 per cent through the September quarter. Residential construction alone slipped by 3.1 per cent to be 10.6 per cent lower over the past year, that sector’s biggest annual drop in 18 years.

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Westpac chief economist Bill Evans said while it was clear the RBA did not want to used unconventional policies, the economy needed more help to get unemployment down and growth up.

He said the RBA was likely to cut rates to 0.5 per cent in February and then to 0.25 per cent in June with quantitative easing (QE) policies to follow soon after.

“While detecting a reluctance to adopt quantitative easing we expect that economic conditions in the second half of 2020, coupled with the need to maintain a credible easing policy, will see the RBA adopt QE in the second half of 2020,” he said.

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