Via Banking Day:
Australian banks “face greater pressure to their profits” a Treasury briefing for their minister, Josh Frydenberg, explains. Or at least they will be under even stiffer pressure if and when quantitative easing unfolds in Australia.
Some dare to guess this may be as soon next week. In any event, QE with dinkum characteristics may slide into place by early 2020.
“Funding-for-lending” is the jargon being used, and the parameters for any roll-out in Australia are left to guesswork for now.
An undated document released under FOI on Friday has the heading, “Supporting the Economy with Monetary and Fiscal Policy” and it’s largely about QE, with plenty to say on banks.
Treasury seeks to stir the government into a more activist budget; but a government over-attached to budget surpluses is unlikely to pay much heed.
“Fiscal policy can play a greater role when monetary policy is constrained,” the briefing urges.
On QE, Treasury has a favourite method, one not much discussed.
“Funding-for-lending” – a periodic QE method getting another workout as of six weeks ago at the European Central Bank – is the unconventional monetary policy option the newish Treasury secretary Steve Kennedy may be pushing at the RBA board meeting next week, while his boss Josh Frydenberg will be thinking about the government’s stance too.
The RBA, Treasury points out, has “stated publicly that purchasing government bonds is the most likely option” and the governor, Philip Lowe, has played down the prospect of negative interest rates.
What the econocrats are talking about privately, the capital market has a clearer view via FOI.
It’s clear Kennedy or influential underlings at Treasury are cynical that large scale purchase of bonds and other financial assets will work at all smoothly – and may in fact worsen worrying trends such as property price levels and housing affordability.
QE bond-buying style “likely has a stronger impact through the asset price channel because it explicitly takes safe assets out of circulation, putting pressure on investors to move out the credit risk spectrum into riskier securities,” the authors argue.
“This, in turn, lowers the funding costs for riskier entities and activities.”
The RBA should buy long dated bonds in Australia and abroad with its QE to attack the currency. We don’t need cheaper mortgages. APRA has already over-loosened and seeking more household debt will only hasten the day when QE becomes permanent.
QE should be used with one eye on structural adjustment away from mortgage debt. The same goes for helicopter money when it arrives.
