Rate hikes and bank deregulation on the cards

One of Australia’s leading economists says renewed optimism about Donald Trump’s fiscal stimulus plans could see the local cash rate begin to rise as early as 2018.

The news of Donald Trump’s US presidency win initially sent shockwaves through mainstream media and global share markets. However, in the days that have followed, the share market has rallied and some economic pundits have said that Mr Trump’s presidency could in fact have positive ramifications.

Speaking to Mortgage Business, AMP Capital chief economist Shane Oliver noted that Mr Trump’s victory speech was “somewhat conciliatory” and suggested that he could potentially be “quite sensible and pragmatic in his implementation of policy”.

“The share markets have concluded that it’s not that bad and that there are some positives in there, and that’s why we’ve seen some of this rebound in markets,” Mr Oliver explained.

“I think since the day he won the election, there’s perhaps been more focus on other aspects of his policies, including the stimulus that could be provided to the US economy. If that dominates then that will help the global economy and also help Australia,” he elaborated.

Mr Oliver highlighted that Trump’s presidency could potentially impact upon Australia’s official cash rate in the coming years.

“If the Trump presidency focuses more on stimulating the US economy and less on protectionism, then that will mean higher interest rates in the US, which will eventually flow through to Australia, but probably not until 2018 at the earliest,” he explained.

Mr Oliver noted that there is still potential for downward pressure on rates in the more immediate future.

“In the meantime the buzz in Australia will still be about whether interest rates remain on hold or get cut further. So, there would be a long lag there from the US to Australia,” he concluded.

The Dodd-Frank Act
Mainstream media reports last week focused on Mr Trump’s pledge to dismantle the Dodd-Frank Act – the infamous banking regulation bill signed into law in 2010 to address the issues that triggered the GFC.

Mr Oliver said Trump’s push to repeal the Act would most likely have a positive effect on US banks in the short-term.

“It will remove a lot of the regulatory pressure on them, and it also has an added benefit that enables them to act as a money maker in various markets,” he explained.

However, as the Act was originally put in place to avoid a repeat of the risks the banks took prior to the GFC, Mr Oliver fears a repeal could contribute to a repeat of some of the circumstances and the risks that led to the financial crisis.

“Where banks get involved in things where they end up taking on more risks, that can leave them vulnerable if there’s some sort of financial market meltdown, and so the Dodd-Frank Act was trying to avoid that,” he said.

Time will tell
While Mr Oliver pointed out the potentially positive aspects of Mr Trump’s presidency, he emphasised that it’s too early to predict which way it will go.

“Do we get the populist Donald Trump that we saw throughout the election campaign, threatening aggressive protectionist measures and triggering a global trade war, or do we get a more pragmatic Donald Trump focused more on stimulating the US economy?”

“I think at the moment share markets are giving Donald Trump the benefit of the doubt and I'd probably be inclined to as well. We've got to wait and see what unfolds,” Mr Oliver concluded.

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Francesca Krakue

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