Kim Bowater, director of consulting at Frontier Advisors and Amy Xie Patrick, portfolio manager at Pendal Group

The risk of a credit crunch is real and rising and with the housing market now falling sharply, and economic data deteriorating, Australia’s central bank signalled it will slash rates twice this year.

In a speech on Tuesday, Reserve Bank of Australia governor Philip Lowe signalled a rate cut as unemployment is unlikely to fall; inflation will remain low and wage growth is non-existent.

But at the Fiduciary Investors Symposium, Amy Xie Patrick, portfolio manager, Pendal Group went a step further and predicted the RBA would embrace quantitative easing (QE) once rates fell to 1 per cent.

“This is a way for the RBA to engage in QE in a very specific way,” Patrick told conference-goers.

“QE will be most effective if the RBA targets the buyback of residential mortgage-backed securities (RMBS) since that specifically lowers the rate of borrowing for consumers.

“The RBA doesn’t want to fuel another property boom cycle but they want to put money in the pockets of borrowers as they are feeling quite stretched,” she said.

Patrick stated the high level of household debt makes Australia’s adoption of QE inevitable.

“High household debt is an issue for most markets but Australia’s debt combined with the housing downturn is fuelling concerns that consumers just aren’t willing to borrow.”

The portfolio manager pointed out that central banks around the world heaved a collective sigh of relief when the US Federal Reserve hiked rates earlier this year as it imposed tightening conditions on the rest of the world.

“However, with the recent escalation in tensions between US and China, investors worry that things will get worse which is why we are hearing more about modern monetary theory,” she explained.

“MMT has risen to prominence as it deals with a low or zero interest rate environment and very low inflation. Importantly, she added, MMT also supports a large fiscal expansion as well as moves by central banks to print enough money to service or repay debt.

“MMT is coming to the fore since there is a perception is that what can be done in the policy space is limited.”

According to Patrick, the MMT argument has grown too because the monetary policy experience has failed to deliver equitable outcomes. Rather it fuelled asset inflation.

“Right now, with the prospects of a trade war looming again and China devaluing its currency, if things get a lot worse the support behind MMT will get a lot more serious,” she said.