“I think for a long time, Australians have been sitting here looking at what’s going on in the rest of world and thinking we were different,” says Melinda Cilento, the head of the Committee for Economic Development of Australia (CEDA). “We were looking over the horizon saying: ‘Things must be really serious in Europe and the US’. “And then this week, all of a sudden it’s like: ‘Wow, we’re like them now’.” HSBC Australia’s chief economist Paul Bloxham agrees: “What the rest of the world has been wrestling with has arrived here too. Lower [interest rates] for longer is now Down Under.” On Tuesday, Australia's Reserve Bank conceived a fresh campaign from its Martin Place headquarters designed to get the Australian economy going again. In a statement accompanying the decision to drop the cash rate to 0.75 per cent, Reserve Governor Philip Lowe pledged himself and his board to achieving “full employment” in the economy, regarded by most economists as a jobless rate of 4.5 per cent, compared to today’s 5.3 per cent. Things immediately started to get a bit weird.

In announcing its decision not to pass on the full official cash rate reduction to its borrowers, the Commonwealth Bank pointed to the queer fact that it is already paying out zero interest rates - or just a whisker above - on $160 billion of deposits, or roughly a quarter of the total deposits Australians have placed with it. Other banks followed suit, earning them a rebuke from Prime Minister Scott Morrison for “profiteering”. To maintain their margins, banks need to be able to cut the interest rates they pay out to depositors to offset the loss of interest income from borrowers. When depositors are already being paid nothing, the next step is to actually charge depositors for keeping their cash in the bank. It can happen: depositors in Switzerland and Denmark are paying such “negative interest rates”. But it's not normal. And it hasn't happened here - yet.

“I’m just astounded that we’re coming to this,” says Brett Le Mesurier, a banking analyst at Shaw and Partners. He calmly points out that the banks are simply fulfilling their duty to shareholders, including the vast numbers of Australians with super nest eggs invested in the big four. “What they’re trying to do is maintain their margin so their share price doesn’t fall. I don’t understand why shareholders need to wear the pain of the Reserve Bank cutting.” Le Mesurier guesses banks will only pass on about 13 or 14 basis points of the next 25-basis-point official cut. “It depends on how much grief they give depositors.” With interest rates now at historic lows, serious questions are being asked about the appropriateness of the Reserve’s actions. New data this week revealed home prices in Sydney and Melbourne have already rebounded 1.7 per cent in September, ahead of the Reserve's widely anticipated move, stoking fears of a resurgent property bubble.

“I’m not sure what more we get from this,” says CEDA’s Cilento. “If you’re not borrowing when the cash rate is 1 per cent, do you really think 0.75 per cent is going to get us there?” New data revealed home prices in Sydney and Melbourne have already rebounded 1.7 per cent in September. Credit:Louie Douvis Former Reserve Bank deputy governor Stephen Grenville agrees interest rates are not the factor holding the economy back and warns of a build-up in “risks” from pursuing ultra-loose interest rate settings. “The further away from normality we get, people just don’t know what to do.” Unconventional policies such as “quantitative easing” – where the central bank buys up assets like bonds and securities – might also not work in an Australian context, warns Grenville, whose analysis of successive rounds of such policy in the United States suggests the first package in 2008 was “a huge benefit”, “but the others were not actually all that helpful”. In the meantime, Grenville warns of the undesirable effect of low interest rates on home values. “In terms of the global ranking of unaffordable housing and household over-borrowing, we already hold a podium position.”

Ultimately, he says, an excessive focus on monetary policy ignores the other crucial part of the solution to low growth: fiscal policy - the tax and spending decisions of government. “With quantitative easing, it delays the recognition that you have to do fiscal policy. It lets the treasurer off the hook for another six months.” Indeed, even as the Reserve Bank was cutting interest rates this week, the body that oversees all central banks, the Bank for International Settlements, was calling on governments to play a bigger role. “The room for monetary policy manoeuvre has narrowed further,” warned Claudio Borio, head of the bank's monetary and economic department. “Should a downturn materialise, monetary policy will need a helping hand, not least from a wise use of fiscal policy in those countries where there is still room for manoeuvre.” Most economists agree it would be desirable to see a shift in what they call the "policy mix" between monetary policy – the interest-rate decisions of an independent central bank – and fiscal policy.

Notes Grenville: “For the last 10 years, we have had extremely expansionary monetary policy and contractionary fiscal policy. The two arms of policymaking are out of sync.” HSBC’s Bloxham agrees: “I think fiscal policy is the answer. Negative interest rates is telling governments they could be spending more. The cost of borrowing is phenomenally low. It doesn’t have to just be infrastructure.” Long-discussed tax reforms, to lighten the tax burden on incomes and shift it to more immovable sources such as land or consumption (via the GST) are easier to do in a low-interest-rate environment, explains Bloxham: “It should be a lower hurdle to commit to doing those other sorts of reforms as well. We know that tax reform costs money, because you have to provide compensation. Those sorts of productivity-enhancing reforms, they’re now cheaper to do than they have been in the past.” Amid widespread calls for the government to take advantage of ultra-low rates to borrow and invest, former head of the Productivity Commission Peter Harris, who is now on the board of Infrastructure Australia, sounds a note of caution: “The great risk of infrastructure is planning. If you’re going to fund infrastructure, you have got to do the planning.” With large-scale public transport projects already underway, particularly in Sydney, Harris says the biggest potential for stimulus lies in smaller projects.

In a 2017 report, the Productivity Commission advocated a review of all local council planning restrictions, such as rules banning the use of footpaths by retail outlets and restaurants. “Every council has a set of restrictions they apply, and they are rarely reviewed. The potential investments are small scale, but spread across the whole country and could occur quite quickly,” he says. Veteran public servant and economist Blair Comley, now working at consultancy firm Port Jackson Partners, is also hesitant about calls for big spending on infrastructure. “My view is that there is a lot already being built and that we are likely to be at close to full capacity for large projects at the moment, certainly on the eastern seaboard.” However, “unsexy” projects - like clearing backlogs of local council works and funding maintenance schedules of roads and bridges - could assist, he says.

More broadly, Comley is cautious about giving the green light to fiscal stimulus. “I’m generally reluctant to push the fiscal stimulus lever. I'm more at the sceptical end of the effect of counter-cyclical fiscal policy. You do it when it’s really obviously needed, like during the global financial crisis. But I do think it is quite hard, politically, to bring a budget back into balance once you’ve done it. “This is not like the global financial crisis, which hit us between the eyes. What we really want to do now is structural, not cyclical. We’re not in a cyclical crisis, we’re in a world of long-term under-performance.” He singles out planning restrictions and reform of the vocational education and training sector. "Your first best policy is to look at those productivity-enhancing things that have been put in the too-hard basket for too long,” he says. Ultimately, it’s about enticing business to invest again, and that’s a question of leadership and management skill: “My guess is that the biggest thing we could do for productivity is improving leadership and management across firms.” CEDA’s Cilento agrees the government could be doing more to remove shackles on business investment, including giving more clarity around crucial skilled worker visas and introducing more generous allowances on new investments. “In the absence of any reductions in corporate tax, more generous allowances on new investment is something that should be considered.”

Loading She is also cautious about abandoning plans to return to surplus: “This idea that you don’t just give away a hard-won surplus straight away is something I have sympathy for.” However, Cilento says Newstart payments are an obvious area for boosting. “If you’re looking for something that’s going to boost consumer spending with a high degree of confidence that it’s going to flow through, I think it the most obvious thing to do.” So, as Australia teeters on the edge of deploying unconventional monetary policies, the future direction of potential government action appears similarly opaque. In contrast to previous reform eras, today’s “burning platform” is less clear, according to Comley.