Is QE blowing Australian bubbles? The question has dogged the FOMC for many years. Now, with Australian QE into its second iteration already, the panic is building. Is it justified?
Chris Joye argues not:
The Reserve Bank of Australia has launched an entirely necessary monetary policy regime that will involve sustained quantitative easing (QE) to secure full employment and ensure that Australia’s trade-weighted exchange rate, and local economic conditions, are not adversely affected by the much more aggressive asset purchases of central bank peers overseas.
In contrast to the government’s COVID-19 fiscal policy package, the RBA’s QE via its liquidity operations, and its $180 billion Term Funding Facility, is not a temporary stop-gap.
This makes a third, six-month round of bond purchases, or QE3, a certainty in October, which is likely to be succeeded by QE4 next year and iterations thereafter.
There is no reason to think the RBA will be minded to taper those purchases from $5 billion a week until it has high conviction it will achieve its goals, which will not be until 2022 or 2023.
As governor Phil Lowe’s protégé and putative successor, deputy governor Guy Debelle argued late last year: “In the situation we’re in at the moment, the right decision is to err on too much support rather than too little support.
Contrary to countless hysterical claims … the RBA’s current QE program has no role to play in blowing asset price bubbles.
Buying five- to 10-year government bonds has no direct impact on local housing demand.
QE does work better in Australia than in the US to exactly the extent that Joye describes. US mortgages price off the 30-year bond so the Fed can directly inflate house prices with bond purchases.
However, it’s a bit silly to argue that the Term Funding Facility (TFF), also a form of QE, is not inflating asset prices. That’s pretty much the TFF’s only goal given it lowers bank funding costs below market.
Whether you see this as blowing a bubble depends upon your ideology. To my mind it is, given it guarantees a considerably higher stock of household mortgage debt over the next three years, which will directly result in the opposite outcome that the RBA wants to achieve in policy normalisation. On the contrary, it will lead only to more TFF and negative interest rates in the next shock.
The other question is whether QE is leading to either bond or stock bubbles. Again, it depends. My view is that bond markets are reacting to structural lowflation and central banks are largely reacting to that, though they are certainly making it worse by relying so much on further rounds of debt issuance.
Stocks are a better category for a bubble with the ASX valuation very stretched for a bourse with no underlying profits growth. But even this can be defended in certain contexts if your valuation metrics are influenced by the low level of bond yields.
In conclusion, the RBA’s buying of Aussie bonds is not blowing asset bubbles directly though stocks are inflated by it indirectly. The RBA buying bank bonds is absolutely blowing bubbles.
Which is what it does best!