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Does the central bank favour the rich?
Current monetary policy strategies, including slashing cash rates and quantitative easing, are inflating asset prices and creating a greater inequality gap, an industry expert has said.
Does the central bank favour the rich?
Current monetary policy strategies, including slashing cash rates and quantitative easing, are inflating asset prices and creating a greater inequality gap, an industry expert has said.
Monetary policies, including QE, work via central banks creating money to buy government bonds from banks. It is hoped that the banks will then lend this cash to the real economy.
As the central bank buys government bonds, demand increases and the price of these securities goes up. Subsequently the yield, or interest rate, on government bonds falls, slashing borrowing costs for households, businesses and the government.
During a recent Fidelity International media briefing, cross asset investment specialist Anthony Doyle told viewers how central banks through QE are simply raising the price of assets.
“One thing we do know is low interest rates and unconventional monetary policy tend to inflate financial assets and generally increase income inequality,” Mr Doyle said.
He noted those who have assets generally do well in this type of environment because the policy is designed to lift asset prices, which creates a bigger gap between the rich and poor.
“And if you think about the sectors and the types of workers that have been most impacted by the current crisis in terms of the lockdown measures that have been undertaken, it tends to be lower-skilled workers on lower incomes,” the analyst continued.
“Because the unemployment rate has risen, there is a lot of spare capacity in the economy, so they don’t necessarily get the wage increases to compensate for rising inflation either.”
“With this in mind, you see the increase in polarisation to the left and the right of politics.”
However, while explaining that economists are unaware of the real-world implications for such policies on the economy long-term, he notes central banks believe they need to act.
“Bear in mind central banks will articulate the reason they are undertaking these actions is because the counterfactual is so bad. If they didn’t do this, you’d have labour markets and unemployment rates much higher than they are,” Mr Doyle said.
The analyst also believes the independence of central banks and government action is likely to diminish, with the two working hand-in-hand to grow the economy.
“The RBA is making it clear that by buying government bonds at the three-year maturity and by having a set target in terms of the yield curve control, it isn’t monetary finance of the budget.
“For me, it isn’t direct finance of the budget, but it is indirect finance of the budget. They are saying we are keeping yields low so you can borrow and you should be borrowing to fill this gap that has been left by private investment and the private sector not going about its normal business because of the shutdowns you’ve enforced,” Mr Doyle noted.
The analyst came out in support of the government supporting the economy, noting they should fill the hole and borrow money at a record-low rate.
“I think you’re seeing this explicitly from Philip Lowe saying the government, states and territories have ready access to capital markets, they can borrow at historic low rates of interest, and public debt is entirely manageable and affordable.
“With this in mind, the RBA and the bond market, these low yields are a gift to governments. They should be borrowing, they should be expanding fiscally in order to support the Australian economy.”
“In terms of central bank independence, I think monetary and fiscal policy will work closer together in Australia and abroad,” Mr Doyle concluded.
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