‘It’s still potent’: Fidelity’s Anthony Doyle on why RBA QE will be avoided

Fidelity International’s Anthony Doyle doesn’t expect the Reserve Bank of Australia (RBA) will need to introduce quantitative easing to boost economic activity, suggesting Australia’s broader economic community is underestimating the impact prior monetary policy easing both at home and abroad will have on the global economy next year.

“At the moment we have a bit of a complex in the professional, economics, and analyst community in terms of everyone rushing to forecast more interest rate cuts and quantitative easing,” Mr Doyle, Fidelity’s Sydney-based global cross-asset investment specialist, said in a briefing last week.

RBA governor Philip Lowe.
RBA governor Philip Lowe.Credit:Alex Ellinghausen

“There’s hysteria at the moment at the economic data, but I believe that the RBA is advocating a patient approach in terms of how the economy progresses over the next year.”

Despite a raft of soft domestic economic data in recent months, including news last week that Australian economic growth slowed in the September quarter, casting further doubt about the RBA’s view that the economy has reached a “gentle turning point”, Mr Doyle said one only has to look at the recent pickup in Australia’s housing market for proof that traditional monetary policy still works.


“It goes to show you how potent, particularly in terms of the housing market, monetary policy can be,” Mr Doyle said.

While many are now questioning whether the lift in home prices and housing finance will lead to anything other than increased household indebtedness and deteriorating housing affordability, Mr Doyle believes it will deliver positive results for the broader economy. Eventually.

“It’s undeniable the data right now is soft, but it will take time for the transmission mechanism of lower interest rates to flow through this economy,” he said, adding monetary policy easing in Australia is more potent than in other economies given the prevalence of households with variable rate mortgages.

“A lot of Australia’s mortgage book is variable rate borrowers, so interest rate cuts have an immediate flow through into the interest rate burden on Australians.”

With household savings jumping to a two-year high in latest national accounts, and anecdotal evidence from some of the nation’s largest lenders, it appears many Australians have used the boost to disposable incomes from lower mortgage repayments and recent income tax rebates to save more or pay down debt.

Weak household consumption in the September quarter, and flat retail sales in October, further underpins that view.

I think they’re comfortable with where they are and are very hesitant to cut rates further.

Anthony Doyle

However, Mr Doyle doesn’t expect cautious behaviour will be sustained over the longer-term

“The improvement in the housing market] will be stimulatory for the economy. I expect Australians will respond by boosting consumption going forward,” he said.

He also expects Australia will be provided a tailwind from an improvement in the global economy following a raft of monetary policy easing from major central banks this year, most noticeably the US Federal Reserve and European Central Bank.

“It’s been really coordinated central bank action,” he said, adding he expects this wave of liquidity should support growth going forward.

“A big reason why I’m more optimistic on the global outlook is that it’s not just the Fed that’s acting and acted pre-emptively in addressing a slowdown in economic growth. 45 central banks globally have [eased policy settings] this year.”

And despite a reluctance from governments to do more to support the economic recovery, Mr Doyle expects that may change next year, including potentially in Australia.

“I think this time next year we may have seen some easing on the fiscal policy side, very much led by Europe,” he said.

“I think that’s a trend that we’ll see in Australia as well. I think the government will hold on to their surplus for as long as they can, and if we do see easing, it will very much come about from tax cuts.”

Given the expected improvement abroad and likelihood of further interest rate cuts in Australia, something he too expects, Mr Doyle said that should be enough to prevent the need for RBA to deploy quantitative easing or other unconventional policy measures to support the domestic economy.

“I think they’re comfortable with where they are and are very hesitant to cut rates further,” he said.

“The housing market response could provide some confidence to the RBA that there is an effect occurring, and they’ll wait to see whether the consumer according the responds and businesses as well.

“I don’t foresee quantitative easing, but much will be upon how the data prints.”

If the domestic economy gets to the point where quantitative easing or other unconventional monetary policy measures are being actively considered by the RBA, Mr Doyle believes the government should think long and hard about continuing to strive for a budget surplus given the potential political ramifications.

“If you look at the experience offshore…it’s stimulated asset price growth. The haves have benefited to the have nots. Income inequality has grown across the developed markets that have implemented quantitative easing and, socially, we’ve seen big shifts to the right or to the left in terms of the political spectrum,” he said.

“You think about Donald Trump. Elizabeth Warren, Bernie Sanders, Jeremy Corbyn, Brexit, Boris Johnson. In Europe, we’ve seen Golden Dawn in Greece and other populist movements in other nations as well.”

Mr Doyle believes income and asset inequality could worsen in Australia if quantitative easing is introduced, leading to a similar scenario where voters may shift away from centrist parties to the right and left of the political spectrum.

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Source: Thanks smh.com