From Westpac this time:
• As mentioned in our front page essay, last week’s RBA Board Minutes did nothing to silence the increasing market focus on the potential for the RBA to venture into more unconditional forms of monetary policy, such as quantitative easing. That is despite RBA Governor Lowe stating later in the week that the RBA is “quite unlikely” to undertake this approach. • So should the debate about QE cease? We don’t think so, as we interpret those comments in the context of a central banker who does not expect to cut the cash target beyond a level where it loses its effectiveness. Indeed, Dr Lowe suggested that its economic goals could be achieved without a “… a massive change in interest rates”. Even so, the market has a more pessimistic view of the RBA’s ability to achieve its goals and hence the QE debate will be ongoing.
• So could QE work in Australia and what would it look like? On the following page we have listed a far from comprehensive list of approaches, which can be divided into 2 main types – those that target shoring up the financial system, such as those used in the GFC, including providing liquidity and cheaper funding to banks, and those more relevant to underwriting growth and the general welfare of the nation.
• As for the former approach, RBA Deputy Governor Guy Debelle has had this to say. “QE is a policy option in Australia, should it be required. There are less government bonds here, which may make QE more effective. But most of the traction in borrowing rates in Australia is at the short end of the curve rather than the longer end of the curve, which might reduce the effectiveness of QE. The RBA’s balance sheet can also expand to help reduce upward pressure on funding, if necessary, as occurred in 2008.” There is no suggestion that this QE is necessary in Australia.
• In our view, it is the second goal that would be more relevant in the current context. The RBA has been increasingly vocal in suggesting that fiscal policy needs to play a bigger role. We would concur with that. With that in mind, and with the RBA’s focus on excess labour market capacity in mind, we think that any RBA sponsored QE would more likely be via support for infrastructure projects which would have multigenerational benefits. We think it should be open-ended, countercyclical and linked to macroeconomic variables as to when the “funds” are invoked or switched off. That would remove the sometimes counteractive signalling that occurred in the Feds multiple QE phases.
Phil Lowe is the last person to ask about Aussie QE. He wouldn’t know if a deflationary bull was up him. Aussie QE is inevitable. Alas it will be too conservative, too late, too small and so we’ll plod on into deflation as far as the eye can see.