JP Morgan's Kerry Craig

Quantitative easing is on the cards in 2020, but will come as a package of unconventional policy reforms instead of a traditional bond purchase program according to JP Morgan Global Market Strategist, Kerry Craig.

QE is “definitely a next year kind of scenario”, Craig said at a media briefing in Sydney yesterday.

None of the Q3 data – including consumer confidence, business confidence or retail sales – has been supportive of the notion that the Australian economy is really gaining traction, Craig said. “So they’re going to cut [rates] again,” he added.

Given that the RBA has pledged not to venture into negative interest rates, Craig believes the path to QE is clear. However, traditional measures like buying bonds will be only a small part of a larger package aimed at stimulated investment and consumer spending, he reckons.

“It’s forward guidance, negative rates, QE, currency intervention, cheap money to the banks, its all of those things,” Craig said. “What you’re likely to get is a package, because each individual one of those doesn’t work… you have to do them all or some combination.”

Craig argued that the RBA has already employed one of these measures – forward guidance – with its heightened level of commentary around their future plans for rates.

When he announced a cut in the cash rate to a record low 0.75 per cent on October 1, RBA Governor Phillip Lowe said the economy “still has spare capacity” and noted that “an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target”.

Lowe’s comments were broadly seen as a firm indication that the RBA is intent on using further measures to prop up the economy.

The trouble for the RBA, Craig commented, is that despite seeing QE being used effectively around the world, what happens when you reverse it is unclear. “We still don’t know,” he said.

Bond purchase will still happen, he predicts, and soon.

“Bond buying is the next likely thing that they will do, and we have the market depth there to be able to do it with $500 billion there in bonds we could start tapping into,” he said.

From there, Craig reckons, “they’ll probably going to do something around unconventional policy”.

Negative interest rates, however, won’t be an option. “That’s proven to be a bit of a black hole around the world,” he said.

Tahn Sharpe is a Sydney-based financial services journalist with a background in financial planning. He writes on advice, superannuation, investment, banking and insurance issues, is a certified SMSF Adviser and holds an Advanced Diploma of Financial Planning.
One comment on “QE but not as you know it”
  1. Avatar Christoph Schnelle

    The Financial Times recently had an article “Profoundly low interest rates are here to stay” and a reader who goes by the pseudonym Occam wrote the following comment:

    “Zero interest rates are an essential characteristic of a large, mature economy. Nothing can grow exponentially indefinitely nor can a large economy continue growing at 3%. Everything is already there, the need for capital is very limited.

    At the same time the supply of capital is super abundant after decades of growth and capital accumulation. So the cost of capital trends towards zero. During the Middle Ages real interest rates were at or near zero for more than 300 years.

    The subsequent industrial revolutions accelerated growth and explosives got more powerful ensuring capital goods got blown up on a regular basis. An unusual period of relative capital scarcity and positive real interest rates. We are going back to the old normal, which is the normal normal, really.

    The last 2 centuries were an aberration, especially the decades after WW II, when the whole world got blown up, leading to interest rates that were structurally elevated. That was an abnormal normal, which felt like the normal normal. But the only reason it felt that way is because the human lifespan is so short compared to these cycles.“

    During the Middle Ages, we had massive inflation or deflation in any given year because harvests were good or bad due to the weather or war, but overall prices didn’t move.

    To me low and negative interest rates are a game changer as an essential component of asset allocation will work less and less. If fixed interest investments cannot go up in value because rates are already at rock bottom, do they stop being superior to cash as an investment?

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