Westpac chief economist Bill Evans raised a few eyebrows with his prediction the RBA would succumb to implementing a quantitative easing programme. He expects the unemployment rate to increase to 5.6% by mid-2020 and, by this time, the RBA would have cut its cash rate target to 0.25%. Some time afterwards, it would announce a plan to buy government bonds on the secondary market on the basis its ordinary monetary policies were not having the desired effects.
The effect of such a programme would be to increase the total amount of exchange settlement funds held by institutions with accounts at the Reserve Bank. (Exchange settlement funds are known as reserves in the US and readers may think of them as actual physical cash sitting in vaults at the RBA*.) Expressed colloquially, the RBA would “print” money and exchange it for bonds purchased from current holders.
An interesting part of this story is Evans announced his prediction the day after RBA chief Philip Lowe gave a speech entitled “Unconventional Monetary Policy: Some Lessons From Overseas”. In this speech, Lowe clearly laid out the requirements for the RBA to engage in an Australian version of “quantitative easing”, which the polite term for printing additional money. He also made some observations regarding negative interest rates.
Lowe made five major points in his speech with regards to unconventional policies and their relevance for Australia.
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“At the moment, though, Australia’s financial markets are operating normally and our financial institutions are able to access funding on reasonable terms.” This statement implies there is no need for the RBA to implement an extraordinary policy measure in the absence of an extraordinary environment. However, “if markets were to become dysfunctional”, the RBA would act.
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“Negative interest rates in Australia are extraordinarily unlikely….it is not clear that the experience with negative interest rates has been a success.” The RBA noted the rising prevalence of the term “reversal interest rate”, the rate “at which lower rates become contractionary”.
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“There is no sign of dysfunction in our capital markets that would warrant the Reserve Bank stepping in.” The AOFM propped up the domestic residential mortgage-backed securities market in 2008. Lowe defined such an action as “a significant intervention by a public sector entity”.
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“If – and it is important to emphasise the word if – the Reserve Bank were to undertake a program of quantitative easing, we would purchase government bonds, and we would do so in the secondary market.” The RBA’s “current thinking” is QE would only “be considered at a cash rate of 0.25%, but not before that.”
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“My fifth, and final, point is that the threshold for undertaking QE in Australia has not been reached, and I don’t expect it to be reached in the near future.” (See point 1.)