Friday, August 24, 2012

QE3 would be a mixed blessing, at best

Straits Times: Fri, Aug 24

MINUTES of the Federal Open Market Committee's (FOMC) meeting earlier this month, released yesterday, show that the US Federal Reserve may embark on a third round of quantitative easing (QE3) sooner than expected. "Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery," the minutes said.

But what is good for financial markets isn't always good for economies. Even as traders cheer the approach of QE3, policymakers in emerging markets have grounds to worry. Singapore, too, should be concerned. It is still trying to cope with high asset prices driven by earlier floods of easy money, when advanced economies loosened monetary policies to fight the financial crisis.

For now, investors are riding high on stimulus hopes. In Asia, Hong Kong's Hang Seng Index gained 1.2 per cent and the Straits Times Index rose 0.2 per cent. Other risk assets also benefited and Asian currencies such as the Singapore dollar and Korean won rose against the US dollar.

But policymakers will not be taking much comfort from this. The earlier rounds of quantitative easing had spurred inflation and asset price increases. A further loosening of monetary conditions is likely to turn the heat up again.

In Singapore, private home prices increased by 0.4 per cent in the second quarter, erasing a 0.1 per cent decline in the previous quarter. The property market has remained relatively strong, even after several rounds of tightening measures by the government, including attempts to rein in speculation.

Low interest rates - which lead to cheap mortgage loans - have been a key support for the property market. The US federal funds rate has been near-zero for years and by the FOMC's estimates, is likely to remain low at least up to late 2014. With yesterday's news, however, market watchers are expecting the fed funds rate to stay depressed even longer, perhaps till mid-2015. This may further encourage buying activity in the real estate sector.

Emerging markets will find it tougher taming inflation this time round because their economies are also slowing. Those which tighten monetary policy to curb price increases will do so at the risk of hurting their GDP growth.

Singapore is facing such a conundrum. Inflation in July rose 4 per cent from the previous year, still relatively high, even as it dropped from June's 5.3 per cent. Meanwhile, the official GDP growth forecast for the year has narrowed to 1.5-2.5 per cent, from 1-3 per cent.

In the end, QE3 may turn out to be a mixed blessing at best. While some investors may benefit temporarily, they should be wary that rising asset prices come at a cost, and can lead to problems later.

Martin Koh | 86666 944 | R020968Z
Sherry Tang | 9844 4400 | R020241C
Senior Sales Director
DTZ Debenham Tie Leung (SEA) Pte Ltd (L3006301G)

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