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Westpac isn’t ruling out negative interest rates in Australia

On Tuesday of next week the Reserve Bank is scheduled to hold its next cash rate meeting.

At present, cash rate futures reveal that the market is divided on what the central bank will do.

Futures are pointing to a 53% probability of rates remaining on hold and a 47% probability of rates being cut to zero.

Could rates go lower?

According to the latest weekly economic update by Westpac Banking Corp (ASX: WBC), its team has suggested that there is a real possibility that the Reserve Bank could not only take rates lower, but also take them into negative territory in the future.

Although the bank maintains is forecast for rates to stay at 0.25% for the foreseeable future, it isn’t ruling out further cuts.

Chief Economist Bill Evans commented: “[A] serious case can be made for the RBA to consider further cuts and entering negative territory for the cash rate if it becomes apparent that the economy is deteriorating even more than is currently expected.”

Mr Evans sees positives in a move to negative rates.

“A small open economy with significant foreign liabilities would certainly see a substantial improvement in the competitiveness of the currency with further rate cuts when other major markets are anchored at their effective lower bounds,” he added.

What are the negatives of negative rates?

It is worth noting that Westpac’s chief economist does have a few concerns over negative rates.

This is mainly the impact they could have on expectations and confidence.

Evans explained: “Is there some nonlinear impact on expectations as rates move into negative – a ‘sticker shock’ even though the same policies have been seen abroad – or does such a bold move strengthen perceptions of the RBA’s determination to deliver on its objectives?”

But Evans believes the Reserve Bank can avoid this by communicating its objectives to avoid any shocks.

“The risks are as much about framing and communication as the policy itself. As we have already seen with the move to ultra-low rates and then QE, if moves come as too much of a surprise, they can exacerbate concerns about the economy and cast doubt on the ability of policymakers to achieve better outcomes,” he said.

Mr Evan concluded: “Although there is a clear current message from the RBA, circumstances can change and astute policy makers (as the RBA has proven to be over many decades) can change with them.”

Foolish takeaway

I would be surprised if rates went lower from here, but anything is certainly possible in the current environment.

But one thing that is for sure, is that in looks set to be many years until rates return to normal levels again.

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Motley Fool contributor James Mickleboro owns shares of Westpac Banking. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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