The End of Quantitative Easing (QE) and its Consequences

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On 18 March 2015, the Australian Centre for Financial Studies (ACFS) hosted a roundtable to discuss the end of quantitative easing (QE) and its consequences. The roundtable was facilitated by Professor Kevin Davis, ACFS Research Director. The 15 participants included academics, economists, credit analysts and senior investment professionals from across the financial services industry, along with staff from ACFS. Discussion took place under the Chatham House Rule. In this Financial Regulation Discussion Paper, we present a summary of the discussion in a non-attribution format.

In a low interest rate environment, investment managers are searching more widely for yield and may look to enter the space traditionally occupied by banks by engaging in direct lending. There is an apparent disconnect between low interest rates in Australia and the lack of growth in credit to households (outside of mortgages) and small businesses. Most participants agreed that governments should take advantage of low interest rates to finance productive infrastructure and ‘de-risk’ greenfield projects to make them more attractive to private investors. Participants noted that the lines between fiscal policy and monetary policy have become blurred, but that decisive central bank action to combat the effects of the global financial crisis was necessary in a world of gridlocked politics. There were disparate views on the strength of the global economic recovery – with some worried about debt overhang, adverse demographics and low productivity in developed nations – but a general sense that the United States is much better placed than Europe. The Australian financial sector has been inflated by household indebtedness, and future growth will be more difficult as growth in household leverage slows and the savings rate increases. Finally, the transition to a more ‘normal’ state of affairs, as interest rates normalise in the United States, is likely to be bumpy.

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This paper was prepared by Martin Foo, Research Officer at the Australian Centre for Financial Studies.

The ACFS Financial Regulation Discussion Paper series provides independent analysis and commentary on current issues in financial regulation with the objective of promoting constructive dialogue among academics, industry practitioners, policymakers and regulators and contributing to excellence in Australian financial system regulation.

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