Quantitative tightening – the continuation of easy money to slow down the economy

“You have that combination in business. The bank has already aggressively hiked interest rates, there is a looming cliff in fixed-rate mortgages, and quantitative tightening is also happening,” he said.

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“It’s like a lot of Australians who haven’t seen rate hikes before and are now grappling with them. The Reserve Bank has no experience with quantitative tightening and how that will affect the economy.”

Both the Treasury Department and the Reserve Bank expect the economy to slow sharply into 2023 as higher interest rates and inflation slow household spending.

Economic growth reached 5.9 percent in the 12 months to the end of September. By the end of next year, growth is expected to slow down to around 1.4 percent.

There are already signs that the RBA’s eight consecutive rate hikes are beginning to have an impact on the broader economy. Spending data collected by ANZ through its network of EFTPOS and credit cards shows that consumer spending failed to keep pace with inflation between November 20th and December 18th.

Independent economist Stephen Koukoulas said just as the RBA’s quantitative easing program has supported the economy during the pandemic, quantitative tightening would help a slower economy.

“It will have a contractionary effect on the economy, which itself will contribute to a lower inflation rate and a slowdown in trend growth, and that will help the bank meet its inflation targets,” he said.

RBA Governor Philip Lowe has acknowledged that quantitative easing will have an impact on the broader economy.

RBA Governor Philip Lowe has acknowledged that quantitative easing will have an impact on the broader economy.Credit:Alex Ellinghausen

In May, Gov. Philip Lowe noted that the cheap cash offered to the country’s banks would be repaid in 2023 and 2024.

“This contraction in our balance sheet will contribute to some tightening of financial conditions in Australia, thereby helping inflation return to target,” he said.

Financial markets assessed the probability of another rate hike at the bank’s February meeting at 50-50. The same markets expect interest rates to peak at 3.8 percent by August.

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https://www.smh.com.au/politics/federal/quantitative-tightening-the-easy-money-sequel-to-slow-the-economy-20221228-p5c92e.html?ref=rss&utm_medium=rss&utm_source=rss_politics_federal Quantitative tightening – the continuation of easy money to slow down the economy

Callan Tansill

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