The former head of the US Federal Reserve, Ben Bernanke, was in Sydney last week for the World Business Forum.
Bernanke is well-known as the man who led the US central bank through the dark days of the GFC (global financial crisis); but he also implemented the controversial decision to stimulate the US economy via quantitative easing (QE).
We think that Bernanke was looking at the Australian situation, and hinting that perhaps QE might not be a bad idea to help push down the stubbornly high $A.
A strong defence of QE
Bernanke had good things to say about Australia’s handling of a possible housing bubble. He backed our efforts to put prudential policies on lending, including APRA’s 10 per cent growth cap on investor housing loans, to prevent excessive growth in house prices.
But it was on monetary policy that we believe Bernanke had a more interesting message for Australia.
Bernanke obviously defended his use of QE. He says QE has been effective and hadn’t had the bad side effects many predicted. He also noted that the US and UK, the countries that had pursued the policy most aggressively, were experiencing the strongest recoveries.
A focus on monetary policy
What was interesting was that Bernanke focussed not on interest-rate policy, but on monetary policy.
It’s no secret that the RBA, which has cut official interest rates to a record-low 2 per cent, has focussed on interest-rate policies to combat a high $A.
As Bernanke says, “If Australia finds it has a strong Australian dollar and it has higher unemployment, then it would have to respond and that would either be by increasing domestic demand or by weakening its own currency.”
But the RBA has already cut rates to record lows and it has been only partially successful. The $A remains stubbornly high. We believe it needs to fall further to between US65c and US70c.
Why not QE?
We believe that Bernanke was hinting that Australia should consider a more extensive use of monetary policy other than interest rates. That means unconventional policies, including QE.
How else would Australia weaken its currency?
As we’ve said, QE isn’t a ridiculous suggestion. If anything the last five years proved that QE is a reasonable policy to adopt if required to help adjust currencies to where they should be.
The recent past has also shown that cutting interest rates to very low levels doesn’t stimulate activity; offshore, it’s been proven to stifle activity.
Australia needs the stimulus from a weaker currency to offset a fall in commodity prices; it would make industry more competitive; make imports less competitive; and stimulate industrial investment and growth. It would also give a big kick to our inbound tourism and services sectors.
Interest rates aren’t doing the job well enough. Eventually that means the RBA will have to consider a form of QE.