How to go negative, safely
Despite confirming in the November Statement on Monetary Policy that the economy will remain exceptionally weak over the coming years the RBA has confirmed that they still consider a negative cash rate to be highly unlikely.
The RBA has raised two potential issues with negative interest rates.
It will hurt the banks’ margins and thus impede credit within the economy.
Negative interest rates may have perverse effects on consumer spending.
Surveys of other central banks who have set interest rates below zero find that the benefits outweighed those potential costs - though it’s possible that these results reflect a selection bias. The RBA clearly disagrees with this view citing unpublished work by other central banks about the large costs of negative rates.
However there is a way to push interest rates below zero without risking the financial system. One solution would be to keep the cash rate at its current 0.10%, but to set the interest rate on the Term Funding Facility (TFF) negative.
The TFF allows Banks to borrow money cheaply from the RBA on the condition that it is lent to Australian businesses, with additional funding available for any lending to small and medium businesses.
Unlike a negative cash rate, negative interest rates on the TFF
· improve banks balance sheets via a lower cost of funding,
· encourage more bank lending by subsidising it, and
· are not directly passed on to consumers because they are tied to business credit.
This resolves all of the RBA’s concerns with negative interest rates by reducing financial stability, increasing credit, lowering the interest rate that firms pay when investing and shielding consumers from exotic negative interest rates.
Under this approach you effectively have Dual Interest Rates. One non-negative interest rate for savers, and a subsidised, potentially negative interest rate for borrowers. The spread helps keep incomes for both borrowers and savers high (even Tim Wilson might like this one) with the spread covered by the RBA.
One objection to this approach voiced by Governor Phil Lowe is that “It would be curious for us to lend to banks at a negative interest rate when the government interest rate was positive.”. But I think this is a misleading way of thinking about it as it is not uncapped borrowing, but rather a subsidy directly tied to business credit. One analogy to this is HECS debt which allows individuals to borrow at very cheap rates usually below the rate that even the Australian government borrows at! When viewed as a subsidy low interest rates are a feature, not a bug.
Why would businesses go and borrow at the moment, when there's so much uncertainty about the future? Any rational person who could borrow at an interest rate of 0% or less would absolutely do so - and with a big enough subsidy that outcome can be achieved. Demand is after all a function of price. Small businesses still face interest rates of ~4% when borrowing, even reducing that a few percentage points would boost their investment capacity right when the economy needs it the most.
The need for further stimulus is large. Negative interest rates can be implemented safely, boosting jobs & wages and should be considered & publicly discussed by the RBA in 2021.