An inflation blow-out unlikely
After a decision to keep rates lower for longer, many market commentators fear that the RBA's ever expanding balance sheet is putting the economy on track for inflation. Nikko AM is not so convinced.
The RBA’s stimulus policies have boosted the economy post COVID-19 driving increases in house prices, retail sales, and employment but what is the price for keeping these rates so low. In this episode, Chris Rands and I discuss the impact of the RBA’s policies on future growth, and question who will pay for it in the long run.
(1) Housing Market under watch
Chris identifies that the most interesting takeaway from the RBA's last meeting was that they will be monitoring the housing market closely to ensure that lending standards are maintained. This is a development from last month's position that lending practices remained sound. Chris believes that the Bank is still far from any policy changes yet, but it is helpful to know where the group's focus is.
(2) QE, term lending and yield curve control likely to go before a rate hike
Chris also notes that we can obtain insight into the RBA's moves by understanding what they are not saying. The bank is firm on interest rates but makes no comment on any of the other policies like QE or yield-curve control. We believe that as the economy begins to recover these policies will be the first to go. Many miss that these policies will have a tightening effect themselves while still being able to keep rates low. We believe that these changes or fiscal stimulus will need to go before anything else.
(3) The inflation blow-out remains unlikely
On inflation, the RBA are sticking to their guns citing that they don't see any inflation blow-outs on the horizon. This also lines up with out analysis. We don't see inflation getting out of control in a world where technology is strong and our population is ageing. Many commentators who predict this blowout are contemplating events that we find difficult to see occurring.
(4) What is the effect of all this stimulus?
In the short term, we believe these policies will be good method of getting employment back to where it needs to be. But research from the International Monetary Fund tells us that while high levels of borrowing provides a boost to GDP in the first four quarters, seven to eight quarters the economy growth starts to drag. In the current context, this would mean a slowdown around late 2022. Essentially, in the long run, we are not dealing with the problem, just kicking it down the road. Without a change to the economy there is no way to simply spend our way out of problems.
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Darren is highly regarded in the fixed income industry and is regularly featured in the press. He is also co-host of the popular Australian podcast series The Rate Debate. He has more than 30 years’ experience in fixed income markets and 25 years...