How could quantitative easing affect your investments?
- Published: September 23, 2019
- Author: Alex Nakonechnyy
Quantitative easing, or QE as it’s popularly known, is an unconventional monetary policy used by central banks to stimulate economic growth. When central banks embark on this strategy, in Australia’s case the Reserve Bank of Australia (RBA), they enter the market to buy large quantities of government and corporate bonds to help put money back into the economy.
QE is a policy that is sometimes used by central banks when interest rates are very low. Here, the cash rate is currently sitting at an historic low of one per cent, following the RBA’s most recent interest rate cut.
The RBA has indicated it would prefer not to drop the cash rate to zero, which is why it may choose to embark on a QE program. This may help assist inflation to reach the target band of between two per cent and three per cent in the short to medium term.
While QE has not been used in Australia before, it has been used in other parts of the world such as the US, UK and Japan. It has successfully helped support these economies during periods of low growth.
What’s QE’s effect on asset classes?
Implementing QE measures would most likely put downward pressure on the Australian dollar, which can help support local exports.
But it would depress returns from cash investments and potentially encourage investors into riskier assets. Previously, investors could generate a three per cent to four percent return on cash deposits. Now cash generates less than two percent. Some investors may choose to invest their cash in riskier assets such as shares in the search for income. This may also lift the share market.
The current interest rate environment may also help to support the property market, as more investors seek to take advantage of lower borrowing costs, which can push up real estate prices.
While the possibility of QE in Australia could become real, the importance of a diversified portfolio should always be high on investors’ agendas.
The information contained herein is of a general nature only and is not intended to be relied upon nor is it a substitute for appropriate professional advice. Whilst all care has been taken in the preparation of the material, it is not guaranteed to be accurate. Individual circumstances are different and as such require specific examination. Asparq cannot accept liability for any loss or damage of any kind arising out of the use of or reliance upon all or any part of this material. Additional information may be made available upon request.