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RBA tipped to bundle unconventional policies

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The Reserve Bank is likely to implement a package of unconventional policies next year to boost the dwindling economy, with quantitative easing not being enough on its own according to JP Morgan.

Following the third interest rate cut for 2019 to a historic low of 0.75 per cent earlier this month, the Reserve Bank (RBA) hinted it may embrace quantitative easing (QE) to improve its outlook.

However, as the Westpac Consumer Sentiment Index has hit a four-year rock bottom at 92.8 points in October, experts and investors have suggested QE will not be enough.

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Kapstream portfolio manager Daniel Siluk told Investor Daily last week QE will not be as effective in Australia as in other economies, urging for the use of “helicopter money,” a direct injection to stimulate the local market.

JP Morgan global market strategist Kerry Craig suggested as consumer confidence numbers, business confidence and retail sales have not been gaining traction in the last month, the RBA is likely to slash the cash rate again, noting they have said they probably will not implement zero rates.

 “They’ll do something around unconventional policy, I think there’s a difference though it’s not just QE we think about, it’s the unconventional policies that they could intervene,” Mr Craig said. 

“And that’s forward guidance, that’s negative rates, that’s QE, that’s currency intervention, it’s buying bonds from the banks, it’s all of those things, and what you’re likely to get is a package. Each individual one of those doesn’t work. 

“That’s where you can look around the world and say, just doing negative rates doesn’t work, just doing QE doesn’t work, you have to have them all or some combination.”

Global central banks have already stepped up with accommodating policies for weakened economies, including cutting interest rates and restarting bond purchases.

JP Morgan has hinted their actions may not be enough, looking to economies including the Eurozone and Japan which are at their limits of potential easing.

Mr Craig commented the trouble for the RBA lays in uncertainty in the reversal of a combination of policies.

“I think it’s likely that they have already entered into the unconventional remit because they’re doing forward guidance by all intents and purposes of a longer unemployment rates of four and a half percent before they start going on to the departure down,” Mr Craig said.

He believes bond buying will be the next likely action for the RBA.

“It just depends on how much they would have to buy,” Mr Craig commented. 

“If you look at where the bonds are held, it’s largely by domestic banks largely due to regulatory reasons, it’s very different to say, where bonds are held in the US and who owns them. So the question is about the structure of our market. 

“And where it is held will determine how much they have to buy, how sticky the other buyers are going to be and how effective, it’s going to be on yields.”

Mr Craig predicted negative rates are unlikely to happen in Australia, saying they’ve been “proven to be a bit of a black role around the world,” but if QE is implemented, it will be rolled out next year. 

Economic reforms, tax cuts and more government spending are needed to support growth, he added, but they are changes that require a shift in mindset and a great deal of political will, both of which can be “challenging.”

“I’d be waiting for the budget to come out and see what support would come through,” Mr Craig said. 

“And then if that would be been trying to hold off and do it for the last gesture more than anything else? 

“So maybe bailing 25 basis points, maybe they [the RBA] start having a conversation around cueing up cuts for 50, but it’s definitely trying something that they don’t want to go down the path of, that they will be forced to.”

 

RBA tipped to bundle unconventional policies
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Sarah Simpkins

Sarah Simpkins

Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth. 

Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio. 

You can contact her on [email protected].

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