The 'new normal' has neutralised the RBA

By Callam Pickering

Prior to the global financial crisis, conventional economic wisdom suggested that a nominal cash rate of zero per cent was a phenomenon reserved for Japan or countries suffering a severe recession.

Our cash rate currently stands at 2. 5 per cent, and is negative in real terms, but I have argued recently that we may need to lower it further to foster sustained growth in household spending and business investment.

The zero lower bound could become the ‘new normal’ for monetary policy but even if it doesn’t our cash rate is set to be consistently lower than we have become accustomed to during the Reserve Bank of Australia’s inflation-targeting period.

He has also argued that the zero lower bound constrains nominal interest rates to the extent that real interest rates (nominal rates less inflation) may not be able to fall low enough to boost investment and push the economy towards full employment.

But the leader of the pack is clearly the Bank of Japan, which has been living with a zero per cent nominal cash rate for the best part of 20 years.

The nasty reality is that a zero per cent nominal cash rate — or thereabouts — may soon be the ‘new normal’ for countries such as the United States, Britain and much of the eurozone.

Non-mining investment has been particularly ordinary, indicating that the return on capital has declined considerably throughout the sector. In previous cycles, a 2. 5 per cent cash rate would have ushered in a boom for non-mining investment.

Read more here: Business Spectator


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