The Reserve Bank of Australia (RBA), our central bank, are tasked at providing economic stability and prosperity to the Australian people. They do this through a variety of measures including monetary policy (ie. controlling the cash/interest rate or QE). Quantitative easing is an unconventional approach and is typically used when interest rates are at grinding towards zero, in which the RBA are left with no other options to stimulate the economy and bounce it out of a potential recession.
This is the scenario the RBA is facing at the moment with interest rates at historic lows (0.25%). With the outbreak of the coronavirus, small, medium and large businesses are being affected, millions of Australians are out of jobs and the economy being challenged. So, what is QE and what impact will it have?
QE is commonly thought of as printing more physical money, but this is a misconception. They simply dig into their cash reserve or create brand new money through their electronic ledger system. With this, they either purchase government bonds or other financial assets from regular banks. This aims to stimulate the supply of money in the economy. This is the first major impact of QE. With the extra supply of money, governments can potentially look at tax cuts or banks can make loans more accessible.
On the other hand, purchasing bonds on such a large scale can push the interest rates on these bonds to such a low level that banks and institutions that previously purchased these bonds will look at alternative methods to receive better interest. This can include lending to consumers for mortgages or businesses, and in turn, stimulating the economy.
The RBA is in the middle of implementing this unconventional monetary policy. As discussed, they are aiming to increase inflation, create low borrowing rates and stimulate the economy to avoid recession.
For now, we will have to sit back and wait for the impact to be felt. Hopefully, this will assist in avoiding Australia’s first recession since 1991.