'Miracle' needed to save the world, because central banks can't, says BTIM's Vimal Gor

'Miracle' needed to save the world, because central banks can't, says BTIM's Vimal Gor

Date
May 11, 2016

Vesna Poljak

Senior markets reporter


Vimal Gor says the US Federal Reserve has completed a 180-degree turn.

The Bank of Japan and the European Central Bank are printing billions in a "useless" attempt at stimulating demand as a "crisis of confidence" erupts over central banks and their diminishing influence.

And for the same reason, the Reserve Bank of Australia may find itself powerless in trying to defeat low inflation by cutting interest rates to fresh record lows.

That is the view of Vimal Gor, who is head of income and fixed interest at BT Investment Management.

Mr Gor is the latest expert to question the wisdom of RBA rate cuts.
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"The theory says yes, but in practice it's unclear as RBA monetary policy has no influence over commodity prices or overcapacity in Chinese and Japanese markets. This takes us back to the question of central bank credibility in being able to deliver on their objectives," he said.

"Take negative rates any further and central banks risk putting the financial system at risk."

Inflation expectations implied by long-dated inflation swaps suggest markets are not convinced that central banks can lift prices through easy policy settings.

"It is clear markets are giving up on central banks to fulfil their mandate in the inflation fighting arena."

Helicopter money, which Mr Gor agrees is a "ridiculous" idea, might be tested, but there is another idea worth exploring.

"The other option is to abandon the inflation targeting mantra which has been pervasive over the last 25 years," he says. Instead, central banks could come up with "a per capita measure of economic activity".

This would limit the pressure to keep lowering interest rates.

"The reality remains that the world is overwhelmed with debt, so that would suggest that we would need to have low rates to make repayment easier, and to discourage saving.

"Ironically low rates spur further adoption of debt because of asset prices that are shooting skywards, and actually encourage more saving because income levels from the existing savings pile are too small to live on."

By the same logic, this increases reliance on pensions.

"The best the world can hope for is a productivity miracle from some new technology to rescue growth and demand, but absent that we are still in for a very tough future, and there is little that central banks can do about it. We really think they are just now figuring that out as well."

Hawk-eyed followers of Mr Gor's investment writings would know that the bond fund manager has advocated for central banks to do everything in their power to save the global economy, including lowering rates.

With no sign of a fiscal response, "sadly it was the only option", he says in his latest report to clients. "Central banks are important institutions that used to fulfil the role of defending the financial system from collapse. If they are now shooting blanks, who's left to perform the role?"

BTIM sees the Reserve Bank of Australia and the Reserve Bank of New Zealand cutting rates further in line with their inflation mandates, suggesting at least a 1 per cent cash rate in Australia or lower.

Mr Gor attributes the global low inflation problem to the fall in commodity prices and excess capacity in Asia. For those banks already at the zero bound or lower, "we are at the point now where this confidence has been entirely lost".

Low inflation in Australia is not new, Mr Gor argues. Government policy has flattered domestic inflation figures from the cigarette tax hikes to regulated price increases for utilities and even the carbon tax.

A relatively small and open economy such as Australia's was always susceptible to becoming caught up in the global low inflation problem. (The peculiar Australian routine of quarterly as opposed to monthly inflation readings may also have prolonged awareness of this.)

BTIM was positioned so as to profit from the disappointing inflation result for the March quarter.

Nor can Australia count on the housing construction boom continuing, the fund manager warns. Australia sits behind only Dubai according to one measure of crane activity and is facing an apartment glut.

One forecaster has already predicted every Australian city except Sydney will be in oversupply in 2017.

Read more: http://www.smh.com.au/business/the-economy/miracle-needed-to-save-the-world-because-central-banks-cant-says-btims-gor-20160510-goqv3k.html#ixzz48duJf500
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