As 2019 draws closer to an end, one of the absolute certainties for the coming year is looking less likely by the day.
In recent months most Australian economic observers have marked 2020 down as the year when Australia’s Reserve Bank would finally run out of ammunition in the form of lower interest rates and would be forced into unconventional monetary policy such as quantitative easing (QE).
Most of them scoffed at the protestations by RBA governor Dr Philip Lowe that such moves were only being contemplated as a last resort and thought that like many other central banks around the world, the RBA would be dragged kicking and screaming into an orgy of bond buying and money printing whether it wanted to or not.
The resolve of that consensus opinion seems to be weakening by the day as the effects of the RBA’s dual interest rate cuts and also cuts by the US Federal Reserve and the European Central Bank and other central banks slowly gain traction.
Consumer confidence finally starts to rise
There was a tiny and tentative indication of lifting consumer confidence with the release of the latest ANZ Bank-Roy Morgan Research Australian consumer confidence survey.
While sentiment still remains fairly gloomy and is sitting near multi-year lows, it is improving with sentiment towards the current economic conditions and those looking five years ahead up 3.9% and 2.7% respectively.
Consumers’ views regarding current family finances and whether now is a good time to buy a household item have also improved, lifting 1% and 1.9% respectively from a week earlier.
Encouraging result given weaker economic growth
ANZ Bank head of Australian economics David Plank said the result was “encouraging”, given that it followed some bleak economic data including a slowdown in Australian economic growth in September and flat retail sales in October.
He pointed to the RBA’s positive outlook in keeping the cash rate steady in December and the continuing gains in house prices which could be supporting sentiment.
There are some voices also now backing the RBA’s preferred option of not resorting to QE and other extraordinary monetary policy measures.
Some voices now backing the gentle turning point
Fidelity International’s Sydney-based global cross-asset investment specialist Anthony Doyle, for one, expects that many analysts are 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,” said Mr Doyle.
“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.”
Like ANZ’s David Plank, Mr Doyle said 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.
He said the improving housing market would deliver positive results for the broader economy but perhaps not as quickly as some might expect.
Australia more sensitive to interest rate cuts
Australia is also more sensitive to interest rate cuts as the vast bulk of borrowers are on variable rate mortgages which pass on cuts fairly quickly.
With household savings now improving and Australians cutting debt and saving more, there should be a trickle-down effect into better consumer spending over time.
“The improvement in the housing market will be stimulatory for the economy. I expect Australians will respond by boosting consumption going forward,” said Mr Doyle.
Lower world interest rates will also help
Internationally, central banks have also been cutting interest rates, with 45 globally easing rates this year.
According to Mr Doyle, the stimulatory effect of those lower global rates should be enough to keep the RBA from QE but admits it all depends on the timing of data.
Mr Doyle thinks QE is worth avoiding too, because it has the effect of inflating asset prices and increasing income and asset inequality, which can also lead to a more polarised political outlook.
All of this is far from an absolute flood of support for Dr Lowe’s “gentle turning point” scenario, but as we all know from the herd mentality in markets, once the momentum shifts it could quickly get crowded on the “no QE’’ side of the boat.