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
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