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Unresponsive economy could trouble RBA

AAP logoAAP 9/08/2016 Garry Shilson-Josling, Economist

Outgoing Reserve Bank governor Glenn Stevens once hoped he'd never have to step outside the cosy confines of conventional monetary policy, but his successor may have to give it some serious thought.

National Australia Bank's chief economist Alan Oster thinks the economic outlook is so lacklustre that quantitative easing, or QE - large-scale purchases of bonds to drive long term interest rates down - might come up for consideration before too long.

If the RBA's forecasts are right it won't.

At last count, annual growth in gross domestic product was a so-so 3.1 per cent but by late 2018, the RBA expects it will be comfortably inside the three to four per cent range.

That faster clip would have a much better chance of chipping away at the unemployment rate.

But not everyone expects that.

NAB's economists expect GDP growth of 2.9 per cent in both 2016 and 2017 - in line with the RBA's latest outlook - before a slowdown to 2.6 per cent in 2018.

That's nearly a full percentage point under the mid-point of the RBA's forecast range for 2018.

It might not look like much, but it is - a difference in employment growth of about 120,000 per year.

Mr Oster said the bank's latest survey of businesses, conducted in July pointed to a "solid near-term outlook".

But then things get a bit hazy.

"While the survey suggests strength in the near-term, the longer term risks are becoming increasingly apparent, particularly going into 2018 as resource exports flatten and dwelling construction turns negative."

That's the basis for the forecast slowdown in 2018, which takes into account but two more cuts taking the cash rate from its current 1.5 per cent it to 1.0 per cent next year.

And its why Mr Oster said that after those moves the RBA may be thinking outside the square and considering "the use of non-conventional monetary policy measures".

When he fronted a parliamentary committee in August 2012, Mr Stevens was asked by school student Hannah McWilliams whether he would consider QE and whether it would work.

He damned QE with faint praise, saying it could not be claimed to have made no difference, but it had hardly transformed the outlook.

"So I guess what I'd say is I hope never to be in a position of having to decide whether we would use quantitative methods," he said.

Even so, he said the RBA had thought about how to implement QE if needed.

And in April he talked about another type of unconventional policy - so-called helicopter money, where the central bank directly finances public sector spending designed to boost the economy.

So the RBA has considered a range of unconventional policy options.

With luck, neither Mr Stevens, or his successor Philip Lowe who takes over next month, will have to use them.

But the RBA is clearly taking the approach of British prime minster Benjamin Disraeli, who famously wrote that he hoped for the best but was prepared for the worst.

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