Australia Update: QE Down Under

Macro

Eleanor Creagh

Australian Market Strategist

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.

Disclaimer

Saxo Capital Markets (Australia) Pty Ltd prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Pty Ltd ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide and Product Disclosure Statement to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as CFDs and Margin FX products may result in your losses surpassing your initial deposits. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.
Please click here to view our full disclaimer.