Australia Update: QE Down Under
Summary: Last night the RBA ear marked 0.25% as the effective lower bound for interest rates in Australia and discussed the potential for Quantitative Easing (QE).
Last night RBA Governor Phil Lowe delivered a speech, ‘Unconventional Monetary Policy: Some Lessons from Overseas', in which he laid out a potential roadmap for the use of unconventional monetary policy tools in Australia.
Governor Lowe made it very clear that the hurdle to implement quantitative easing was high and unlikely to be necessary, but could be considered once the cash rate reached 0.25%, now clearly the effective lower bound. With the cash rate currently sitting at 0.75% that leaves two further rate cuts in the pipeline before QE would be considered. And at that point the decision to embark upon buying government bonds would be taken with far greater consideration than the decision to cut the cash rate. Should the situation arise Lowe stated the purchase of government bonds would be preferred and state government bonds could be included, but that the purchase of private sector assets was unlikely. The purchase of government bonds is preferred as this gets “into all corners of the financial system”.
During the speech, Lowe outlined that implementing a QE package in Australia would only be considered if there were “an accumulation of evidence that, over the medium term, we were unlikely to achieve our objectives” but that he did not “expect us to get there”. However, less than 12 months ago the RBA were guiding that the most likely move for interest rates was up. Of course, the central bank will always guide to the glass half full, being the traditional backstop of confidence. But to date, inflation remains stubbornly low, the labour market has continued to deteriorate, and for the RBA to meet its mandated inflation target and full employment goals (4.5%) further stimulus measures will be needed. This suggests that despite the Governor’s claims to the contrary, that if the status quo continues then the prospect of QE in Australia will become a surety. Although we are well aware that unconventional monetary policy tools are ineffective in combatting the structural challenges that not just Australia, but also other countries throughout the developed world face, it seems inevitable that central bankers are going to do more of the same. In addition, the Australian government’s fixation on returning the budget to surplus and limited appetite for implementing a complementary fiscal stimulus package leaves the RBA doing the heavy lifting with respect to the Australian economy. The warning today from S&P that Australia’s AAA credit rating could come under fire if the government were to deploy more fiscal stimulus plays into the government’s hands on maintaining the surplus fixation.
We think it is inevitable the RBA will have to lower the cash rate further, spare capacity in the labour market will continue to stunt wage inflation and whilst growth remains subdued and inflation and unemployment well off target the case for unconventional monetary policy will remain a point of focus/speculation.
A more detailed discussion of the case for continued easing and ongoing consumption pressure can be found in yesterday’s update - Wage growth MIA, Consumption Pressure Remains.
Quarterly Outlook Q2 2022
Quarterly Outlook Q2 2022: The End Game has arrived
- Shocks from covid and the war in Ukraine have forced the global financial and political world to change, but what will the end game be?
Productivity and innovation have never been more importantAs the world economy hits physical limits and central banks tighten their belts, could equities be facing a 10-15% downside?
The great EUR recovery and the difficulty of trading itIf the terrible fog of war hopefully lifts soon, the conditions are promising for the euro to reprice significantly higher.
Tight commodity markets – turbocharged by war and sanctionsWith supply already tight, commodities keep powering on. But will it last for yet another quarter?
Between a rock and a hard placeGeopolitical concerns will add upward price pressures and fears of slower growth, while volatility will remain elevated.
The Great ErosionInflation is everywhere and central banks try to combat it. But will they get it under control in time?
Australian investing: Six considerations amid triple Rs: rising rates, record inflation and likely recessionWhile global financial markets are struggling in an uncertain world, the commodity-heavy Australian ASX index is poised to keep a positive momentum.
Cybersecurity – the rush to catch up with realityWith the invasion of Ukraine, governments and private companies are rushing to reinforce their cyber defenses.