Australia’s economy is facing a difficult time and its central bank, Reserve Bank of Australia (RBA), is considering a number of new policies to get its cylinders firing, including the idea of Quantitative Easing. It is something that has never happened in Australia.
The RBA recently confirmed that governor Philip Lowe will officially give a speech on unconventional monetary policies like quantitative easing (QE), the buying of government bonds to inflate the money supply. The speech titled ‘Unconventional Monetary Policy: Some Lessons from Overseas’ will be delivered at the annual Australian Business Economists (ABE) dinner in Sydney on 26 November.
What is quantitative easing?
Quantitative easing (QE) is an event where new money is printed by a central bank, like the RBA, which is then put towards the buying of financial securities (like home mortgages or shares) and long-term, fixed-rate government bonds (a loan from the government). The increase in money supply helps to maintain lower interest rates, encourage spending and lift the economy. It’s been used in other countries like Japan and England.
“All four rounds of the BoE’s [Bank of England] QE were
regarded as effective in influencing financial markets, albeit to different
degrees; … The BoJ [Bank of Japan] programmes have not led to higher inflation
expectations despite creating extremely accommodative financial conditions and
pushing up actual inflation and GDP to some extent.”
– Dr Lowe
Dr Lowe has previously said the most plausible form of QE in Australia would be buying government bonds to lower the “risk-free” interest rate to influence borrowing costs across the economy and to put downward pressure on the Australian dollar.
Unemployment rate increase
The Australian Dollar fell on Thursday and is expected to dip even further for more losses after the October jobs report revealed a surprise increase in the unemployment rate RBA may cut its cash rate again bringing QE a step closer.
Australia’s economy cut 19k jobs in October 2019, leading the unemployment rate to rise from 5.2% to 5.3%, resulting in Australian interest rates being cut three times this year in hope of fostering the ‘full employment’ and faster economic growth. The bank says it needs to get inflation back within the 2%-to-3% target band.
Falling cash rate
The cash rate is the term used in Australia and New Zealand for the bank rate and is the rate of interest which the homogeneous central bank charges on overnight loans between commercial banks. This allows the RBA and the Reserve Bank of New Zealand to adjust the interest rates that apply in each country’s economy to ensure adequate money supply.
The RBA’s cash rate is the benchmark for the country and it affects various factors including the rate of inflation, the amount of jobs in the country and ultimately, the state of the economy. The central bank lowers it to stimulate the economy and increases it when things are going well to give everyone a bit more of the pie.
Controlling inflation preserves the value of money and encourages strong and sustainable growth in the economy over the longer term. However, the cash rate has been falling for the past few years and has reached an all-time low of 0.75 per cent at 6 November 2019.
RBA policymakers have made frequent references to ‘unconventional’ policy options but remained zipped about exactly what they are, although many now see the term as a byword for quantitative easing. The RBA needs to get inflation, which is sensitive to economic growth, back into the 2%-to-3% target band in a manner that can be sustained over the medium-to-long-term.