September 2013

QE tapering puts Australian growth at risk
The speculation over candidates for the top job at the US Federal Reserve is a strong reminder to Australian banks, and Australian businesses, that we are still very much at the mercy of harmful US economic headwinds.

With Larry Summer’s withdrawal from the field, Janet Yellen has emerged as the leading candidate, with a widespread feeling that she is a fellow traveller with the outgoing Ben Bernanke on monetary policy, and would wind back post-GFC monetary policy intervention more gradually, currently totalling $85 billion in monthly treasury and mortgage bond purchasing.

It is widely expected that the US monetary base will continue to expand proportionately to asset purchases, allowing for a steady ‘soft landing’ for global markets once the cheap money tap is turned off. This is despite jittery market reactions to ‘taper talk’ by Ben Bernanke earlier this year, and an aversion to strong data releases that could speed up the tapering of Quantitative Easing (QE) measures.

So, why is this important to Australia?

A look at conditions in Australia show an economy which wants to grow. The fall in the dollar since May has been a boost for exporting industries, and low interest rates are fuelling housing market growth at the expense of first home buyer affordability.

Incipient “green shoots” of credit demand from business are in evidence, and are spreading among smaller businesses which have been in retreat since the Global Financial Crisis.

The tapering of QE measures in the US, however, would add a layer of complexity to this relatively benign picture. Most importantly, it would impact on the ability of the Australian banks to borrow offshore, as debt yields would continue to rise across the globe. Wholesale funding would become difficult to access, and more expensive.
Regardless of the Reserve Bank of Australia’s policy positioning that has delivered record low interest rates, Australian banks would have little choice in either passing these costs onto borrowers, or restricting the credit flow. This would put some severe brakes on the ability of businesses to fund growth. And in an environment of record low official interest rates, the banks’ ability to raise funds locally through deposits would also be constrained.

Australia itself has very shallow domestic debt markets and the evolution of any significant retail bond market is some years away, so there are few alternatives for banks to raise funds. Despite much talk, superannuation funds have not developed the sophistication to provide any alternative funding source.

With returns on deposits heading south over the last 18 months, investors have looked away from deposits and towards the share market, and more recently property, as preferred asset classes. In this environment, any rekindling of the “deposit war” between the banks would have them even more out of step with RBA policy. If they raised deposit rates they would be likely to raise lending rates which would both stymie business lending demand, and pour water on the housing market. Already, the Basel III regulatory burden is raising the cost of some forms of working capital finance, particularly for smaller businesses.

So as President Obama ponders who will be the next head of the US Federal Reserve, his choice will reverberate around the world. The speed of tapering off QE measures is a crucial issue for Australian banks and our economy, pockets of which are still trapped in neutral.

It is volatility, and uncertainty, our growth prospects do not need at the moment, and threaten to be a potentially unwelcome brake on an economy which, domestically at least, is showing some modest but encouraging signs of growth.

Forward Borrowing Intentions – All Lenders
  SME & Micro Corporate Institutional Total
1 April 2008 10.2 8.0 1.1 5.6
1 April 2009 9.5 8.6 2.0 5.3
1 April 2010 6.3 6.7 5.2 5.4
1 April 2011 6.3 6.9 5.5 5.9
1 April 2012 7.8 6.5 4.2 5.4
1 January 2013 7.8 7.0 5.0 6.3

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