We expect further fiscal and monetary stimulus before the Reserve Bank of Australia (RBA) ventures down the QE path. However, much work is likely being undertaken behind closed doors. We would expect some more detailed public discussion from the RBA when the cash rate moves below 1%, which we see happening later this year.
Drawing on the QE experience of our US and European colleagues as we think about an effective Australian QE framework and given some of the unique features of the Australian borrowing landscape. The objective will be to lower end borrowing rates to households and businesses and lift lending volumes. Such measures will probably need to be delivered with open ended forward guidance to ensure maximum and continued downward pressure on yields.
While the QE toolbox is large and we explore multiple possibilities, there are three measures that we think have most merit in the Australian context and could be adopted – greater use of OMO, the purchase of RMBS, and EU-style targeted LTROs. There are also other options to encourage business lending although some fall outside the RBA’s scope.
We are mindful that there are multiple challenges. A key one will be to try and build in mechanisms/conditionality to ensure that measures which lower borrowing costs for lenders are passed through to end household/business rates and also increases the volume of lending. TLTROs appear to have an advantage here especially if there are no funding pressures and some desire to encourage lending outside of housing.
It is outside the scope of this article, but we expect the QE debate in Australia to be spirited. Indeed, it is likely to raise numerous questions including an over-reliance on housing, potential to refuel borrowing and debt, intervention in markets and misallocation of capital. The global experience is instructive but we are mindful that the experiment is not yet over. The risks from adopting QE measures in Australia, however, need to be considered in the context of the alternative which is likely to be outright recession. We put the probability of QE adoption in the next 3 years at at least 30%.
