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
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