Quantitative easing and the Australian economy
You’ve probably heard the term being used quite a bit recently… ‘quantitative easing’ has been a hot topic in financial news reports since the impact of the global pandemic was felt earlier this year. The Reserve Bank of Australia (RBA) announced the introduction of a $100 billion quantitative easing measure in November and has already begun the process.
The primary objective of the policy is to help keep interest rates down and to encourage economic recovery… after what has been an extremely challenging year.
Historically, central banks from many different countries around the world have employed quantitative easing as a tool to stimulate economies after instability.
For example, since the Global Financial Crisis in 2008, the US Federal Reserve has used this measure four different times to combat the effect of economic turmoil.
“Quantitative easing is designed to support the economy — but its effects flow well beyond central banks and into everyday investments.”
Quantitative easing explained
Some articles you read will describe quantitative easing (QE) as printing money… but that is an oversimplification. The measure is far more complex than just pumping out more bills and putting them into circulation.
QE is classified as an unconventional monetary policy. It is designed to stimulate economic recovery by increasing the supply of money. Central banks seek to raise liquidity within financial institutions and in turn bolster the country’s overall financial system.
Here in Australia, the RBA’s process involves purchasing government bonds from banks and other financial institutions. The payment the banks receive from the sale provides the liquidity they need to be able to offer more loans. And more loans – either for assets such as houses or cars, or for business development – are beneficial for growth and are recognised as major drivers in economic recovery.
In addition to increasing the banks’ ability to lend, QE is also believed to help keep interest rates down. During a time of already record lows, competition within the lending industry will continue to have downward pressure on rates. The theory is that this will enable borrowers to find the best rates on offer and borrow more… which in turn means they will spend more – encouraging higher demand which equals job creation and economic bounce back.
What is involved?
The $100 billion program is already underway, with the RBA committed to purchasing $5 billion worth of bonds every week for a six-month period.
The scheme will be split between federal and state/territory bonds and they will span across five to ten-year bond maturities.
The RBA will buy the bonds on the secondary market from banks and other institutions. RBA Governor Philip Lowe has expressed that he is not considering buying direct as this could blur the lines between monetary policy and fiscal policy. Governor Lowe said,
“I want to make it clear that our purchases will be in the secondary market and we will not be purchasing bonds directly from the government.”
He also highlighted that the regular interest payments and final settlements associated with government bonds will still be applicable.
“It is important to point out that the bond purchases by the RBA will have to be repaid by the Government at maturity. They will have to be repaid in exactly the same way as would occur if the bonds were held by others. The fact that the RBA is holding some bonds makes no difference to the financial obligations of the government, other than through a lower cost of finance.”
“Understanding quantitative easing helps investors make sense of market movements during periods of economic stress.”
How will it help the economy?
The key benefit to the economy will be the increased availability of funds from lending institutions. If more people are able to borrow, then more people are spending money and the economic wheel is turning.
But there is also an additional impact… as the QE measures will devalue the Australian dollar.As the currency drops, this will benefit Australian exporters as our goods become cheaper for overseas buyers… and after the year we’ve had, this can only be a positive outcome!
Never before has the RBA used QE measures to support our economy. This decision is indicative of how challenging the current climate has become, and we will be keeping a close eye on economic conditions in the coming months.
In the meantime, if you have any questions or you want to discuss your own personal financial position, please contact our team… we are always here to help and offer professional advice.
About the author
Marius Fourie - Director & Business Advisor
As Director and Business Advisor, Marius uses his accounting expertise and empathetic skills to work directly with business owners and help them feel at ease with their finances.
Marius saw a common need in clients that just wasn’t being met by accounting providers.
That need was for clear, open communication and streamlined accounting services that didn’t come padded out with any unnecessary features.
Business owners just don’t have time to compare different accounting firms to see which one has the best packages with the best inclusions (many of which they would pay for but never use).
Key Takeaways
QE Is a Crisis-Response Tool
Quantitative easing is usually introduced during periods of economic stress to support growth and stability.
Lower Interest Rates Affect Asset Prices
QE helps suppress interest rates, which can push investors towards growth assets such as shares and property.
Market Effects Can Be Uneven
While QE can lift markets overall, its benefits and risks are not evenly distributed across sectors or asset classes.
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Frequently Asked Questions
What is quantitative easing (QE)?
Quantitative easing is a monetary policy tool used by central banks to stimulate the economy by purchasing government bonds and other financial assets, increasing liquidity in the financial system.
Why do central banks use quantitative easing?
QE is typically used when interest rates are already very low and traditional policy tools are less effective, particularly during economic downturns or financial crises.
How does quantitative easing affect interest rates?
By increasing demand for bonds, QE pushes bond prices up and yields down, which helps keep interest rates lower across the economy.
How does QE impact financial markets?
QE can support asset prices such as shares and property by encouraging borrowing, investment and risk-taking, though it can also increase market volatility when policy settings change.
Does quantitative easing cause inflation?
QE can contribute to inflation over time if increased money supply leads to higher demand, though the impact depends on broader economic conditions and how the policy is unwound.
What is quantitative easing (QE) and why does it matter?
Quantitative easing (QE) is when a central bank (like the RBA or US Federal Reserve) injects money into the economy by buying financial assets (usually government bonds) to help lower interest rates, support lending, and stimulate economic growth — especially during tough economic periods.
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