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Thursday, 13 June 2019

QE, or not QE?

Markets ponder QE

QE, or not QE?

That could soon be the question.

If NAIRU is much lower than previously believed then this might have profound implications for policy.

It might mean that we have 100,000, 200,000, or even more unemployed persons than necessary. 

With no apparent prospect of inflation picking up towards the target or unemployment falling sharply, we're now getting towards the point where markets might be expecting a cash rate a just 0.50 per cent as being more likely than not.

Here's the implied yield curve at market close today:

Source: ASX

Two more cuts priced, and soon it could be three.

And if we do get that low, then the next question will be, what then happens with regards to quantitative easing?

And, indeed, what might extensive QE actually look like in Australia?

Possibly the buying of mortgages, or the provision of attractive funding to banks.

Supportive for stock markets and asset prices, and good news for borrowers.

To misquote Polonius: neither a lender nor a saver be!