2019-12-15 07:38:121970-01-01 00:00:00

RBA Stimulus Looms

The RBA may look to the more unconventional monetary policy control of quantitative easing if the cash rate reductions are not fully passed on by the banks.

The more extreme stimulus mechanism of quantitative easing may be carried out as Australian banks such as Westpac and ANZ have failed to pass on the latest RBA cash rate reduction in full to its customers. It is also expected that the banks will fail to pass on fully any future cuts in the cash rate. Therefore the RBA’s intended strategy to stimulate the economy through the cash rate reduction is not effectively being carried out.

ANZ justified not passing on the rate cut to its customers as their net interest margin is already tight. The bank reports that the $175 million in customer remuneration costs having suffered as a result of the Royal Commission.

The RBA argues however that the banks wholesale costs have now reduced to as low as those experienced in 2017. Moreover, the rate hike by the banks of 15 basis points last year in preparation for remuneration costs should have factored in the remuneration – allowing them to pass on the latest reduction from the RBA.

Therefore the RBA may now be looking at the unorthodox method of introducing more money into the money supply. This is known as quantitative easing.    

In Australia, this would not be regarded as an unprecedented move. The RBA last conducted quantitative easing measures in 2008 during the Global Financial Crisis. This was carried out by the RBA easing pressure on banks through buying their highly rated securities including government bonds, bank paper and mortgage backed securities from the banks under the agreement that the banks would buy the securities back later once the crisis had subsided. This was known as the “repos” agreement. The revenue this provided allowed the banks to provide additional lending to customers, which in turn effectively stimulated the economy. Notably, residential mortgage backed securities at their peak in late 2018 accounted for half of the purchased collateral held by the RBA.

The Deputy Governor of the RBA Guy Debelle has suggested that this style of quantitative easing is again being considered.

Abroad, even bolder changes to monetary policy has been made to stimulate struggling economies. The US Federal Reserve exercised an extreme quantitative easing period in response to the Global Financial Crisis also. The US Federal Reserve more than tripled their balance sheet from $US1.25 trillion to $US4.5 trillion over a four year period beginning in 2008. With the additional liquidity supplied from the US Federal reserve, US banks were able to pass on extremely low interest rates which in turn assisted in recuperating the economy.

If the RBA was to put in place the unconventional change to monetary policy in the form of quantitative easing, it would likely come only if further traditional controls became exhausted such as additional cuts to the cash rate and remedies within fiscal policy.

The cash rate currently stands at an all-time low of 1.25% since it was lowered after the last RBA meeting on 05 June 2019. The RBA had previously held the cash rate twenty-five basis points higher at 1.5% for thirty-one consecutive months.

It is widely expected that RBA will lower the cash rate by at least another twenty-five basis points to 1% before the end of the year. Investment bank JP Morgan came out with the most dovish forecast prediction of the RBA lowering the cash rate four more times by another seventy-five basis points to an almost non-existent 0.5% by mid 2020.

In terms of fiscal policy, the government has already initiated the purchase of small-business loan securities valued at $2 billion through the Treasury’s Australian Office of Financial Management, which manages the Australian Government debt portfolio.

Consumer behaviour also greatly impacts the performance of economy and with the latest release of Westpac Bank’s Consumer Confidence Report this morning, consumers are indicating that although they believe the economy will slightly improve over the next twelve months, they are cognisant of the global economic instability and in response tending to hold on to their money.

If future fiscal and traditional monetary policy controls do not effectively stimulate the economy to a level which satisfies the RBA, combined with further apprehension in consumer spending, it is likely that the RBA will step in with a more extreme change to monetary policy such as quantitative easing.

By Isaac Batterham

Click here for a 7 days access to our Lotus Blue Portal.

KOSEC does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information provided. KOSEC is intended to provide general information only. Please be aware that investing involves the risk of capital loss. This message is confidential and may be privileged. It is intended only for the use of the addressee named above. If you are not the intended recipient, any unauthorised dissemination, distribution or copying is illegal. We do not guarantee the security or completeness of information hereby transmitted and are not liable in either respect or in respect of any delay. Nothing in this message is intended as an offer or solicitation for the purchase or sale of any financial instrument. Any market prices or data, unless specifically verified and identified as such, are not warranted as to completeness or accuracy. Kodari Securities Pty Ltd (KOSEC) is a Corporate Authorised Representative (No. 399 556) of Longhou Capital Markets (AFSL No. 292464) which is regulated by the Australian Securities and Investment Commission (ASIC). KOSEC wishes to disclose that KOSEC and its staff may hold stock they recommend in their own portfolios and that any decision to purchase recommended stock should be done so after the purchaser has made their own inquires as to the suitability to their own requirements. Click here to view our FSG.

KOSEC Terms & Conditions

Kodari Securities Pty Ltd (CAR 399556) trading as KOSEC is regulated by the Australian Securities and Investment Commission (ASIC). KOSEC is a financial services company and any information provided by its platforms, portals, reports and documents is protected by copyright. Any unauthorised production of this information is prohibited.
KOSEC reserves the right to change or remove any information provided on our website, reports or any documents including these terms and conditions at any time without notice. The change or modification to the terms and conditions will be effective immediately upon posting an updated version on our website, necessary platforms and documents. It is recommended that you review the information provided on our website, including these terms and conditions frequently for any changes.

Disclaimer
KOSEC provides general advice only. The information provided is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice. KOSEC recommends that you obtain your own independent professional advice before making any decision in relation to your particular requirements or circumstances. Please make sure you read our Financial Services Guide (FSG).

KOSEC does not guarantee any returns. Past performance of any product discussed is not indicative of future performance. (We urge that caution should be exercised in assessing past performance. All financial products are subject to market forces and unpredictable events that may adversely affect their future performance). Investing in the stock market can incur huge losses. Please also be aware that fees will incur on every transaction regardless of the performance of your investments or returns generated. Employees and or associates of KOSEC may hold one or more of the stocks, securities or investments reviewed by the company.

Your use of information from our website, reports, documents and from talking to our representatives/associates is at your risk. Under no circumstance should the investment be based solely on KOSEC information and general advice. You should seek professional financial planning advice.
KOSEC aims to maintain the accuracy of the data and information provided on this website, by using information prepared from a wide variety of sources, which KOSEC to the best of its knowledge and belief, considers accurate and does not make any representations or warranties of any kind, expressed or implied, about the completeness, accuracy, reliability, suitability or availability of the information provided.

We may at times refer to third parties, which the details of these third parties have been provided solely for you to obtain further information about other relevant products and entities in the market. KOSEC has no control over the information third parties have, or the products or services offered, and therefore make no representations regarding the accuracy or suitability of such information, products or services. You are advised to make your own enquiries in relation to third parties. Our inclusion of any third party content is not an endorsement of that content or the third party.

Fees
As a client you will be charged a yearly service fee and a set brokerage fee per transaction. Your service fee will automatically renew at the end of your agreed 12 month period at the same rate advertised at the time. Your credit card or bank account will be charged for a further year following which will again auto renew until you cancel your yearly service fee. You can cancel the auto renewal at any time in advance of the renewal date by contacting us. KOSEC is aware of the need to ensure the security of your credit card details and our payment systems are compliant with the Payment Card Industry (PCI) Data Security Standard.

Privacy
You consent to receiving email correspondence from KOSEC, as well as companies KOSEC has an association with. These emails will be sent by KOSEC and third party companies. You can opt out of receiving any category of emails at any time by contacting us. We may from time to time inform you of special offers, or even ask your opinion of the services we provide, but your involvement is optional. Should you request us to do so, we will archive your details.

Indemnity and Liability
You indemnify KOSEC from all claims or threatened claims, suits, demands, damages, costs as well as including legal costs incurred in dealing with any threatened claim, expenses made by any person or corporation against KOSEC and any other amounts which is caused by KOSEC providing information, execution and General Advice.

You hold KOSEC harmless and release it from any liability in respect of any loss, harm or damage arising from a decision made by you on the basis of information obtained through the use of our portal, reports, documents or any General Advice given and any transaction taken place.

You hold KOSEC harmless and release it from any liability in respect of any loss, harm or damage arising from delays in executing orders for the client and acknowledges KOSEC makes no guarantees about the time taken to execute an order on behalf of the client. You acknowledge that KOSEC relies on third parties in providing technology and release KOSEC from any harm, loss or damage you may suffer as a result of the failure of such information technology.

Cookies and Links
KOSEC website, and its portal uses cookies, which lets us identify your browser while you are using the site or our portal. Cookies do not identify you personally. They simply allow us to track your usage patterns. If you prefer not to receive cookies, you can configure your browser to reject them or to notify you when they are being used. The functionality of the KOSEC website may be impacted if you restrict the use of cookies.

Fill up the form below and we will get back to you as soon as possible.

CLAIM YOUR FREE E-BOOK &
7 DAY ACCESS TO LOTUS BLUE

STOCK MARKET SUCCESS

KOSEC’s CEO, Michael Kodari’s new book, “Stock Market Success” valued at $39.95, available at Dymocks book stores with all the proceeds going to Dymocks Children’s Charities.

CLAIM YOUR FREE E-BOOK WHEN YOU LOGIN TO LOTUS BLUE INVESTMENT PORTAL

Latest TV Commercial