Australian interest rates never fell below 3 per cent during the GFC, unlike other countries where they fell to zero and stayed there for years.

But now rates are only 1 per cent and, by February, CommSec and Westpac believe rates will hit 0.5 per cent. The minutes of a July Reserve Bank meeting, released today, indicated that it was prepared to go lower to boost the economy.

“Members would consider a further easing of monetary policy if the accumulation of additional evidence suggested this was needed to support sustainable growth in the economy and the achievement of the inflation target over time,” it said.

But zero or near-zero interest rates are unheard of outside of financial crises and Australia is hardly in a crisis, yet. Employment growth and labour force participation are strong – the latter at a record high.

Not a crisis but not perfect times

However, economic growth is slightly lower than expected and wages have been stagnant. Most critically, inflation was below the RBA’s target, at 1.6 per cent.

NAB’s Global Head of Research Ivan Colhoun told Stockhead these concerns led to the RBA’s current stance.

“I think there’s this spectrum where the Reserve Bank wants growth to be solid, keep unemployment down, see wages pick up which helps inflation,” he said.

‘That’s what they’re trying to achieve. ‘They have to do that with everything that’s going on, and that’s their instrument.”

‘The economy is not in a hopeless situation, but there are headwinds to grow out of the trade situation. Our central bankers are watching that very closely.”

The next time we’ll hear Phillip Lowe will be at the Jackson Hole symposium on Saturday. He will be speaking at the end annual of (US) summer retreat for central bankers.

His speech will likely to provide another broad outlook to an audience of his global colleagues, who are facing similar challenges.

If rates hit zero…then what?

Our markets went up on both days in June and July when rates were cut, as expected.

But eventually, you cannot cut rates anymore. Then what? One alternative is quantitative easing and the RBA has entertained that possibility – but if, and only if, rates hit zero.

The most likely of these are the purchases of government bonds. NAB said in a client note yesterday the specific response would depend on the specific circumstances.

NAB also said “it’s hard to see either interest rate reductions or non-conventional monetary policy having any significant or rapid success in returning inflation to target”.

“Indeed in the current circumstances, policy measures to support consumer spending and/or raise wages growth would seem to be more appropriate.”

Today, CommSec told its clients the RBA was entertaining the possibility. However, such a prospect was nowhere near replacing conventional monetary policy.

‘We don’t think this [today’s minutes] is suggesting that QE is imminent, but rather that the RBA are doing their job of evaluating possible options should they be needed,” senior economist Kristina Clifton said.