Quantitative Easing: A Two-Minute Guide.

investment strategy

By

Paul Ashworth, Managing Partner
David Clark, Director
Tristan Bowman, Manager


Posted 27 November 19

In a speech last night, the governor of the RBA (Philip Lowe) outlined the central banks Quantitative Easing (QE) playbook. This is the first time he has explicitly addressed the RBA’s preferred approach to QE, making it a historic speech for the future of monetary policy in Australia.

Overview

The RBA believes that Australia is in a fundamentally different position to other developed economies like Japan or Europe, as we have a better demographic profile, higher growth and a more stable, well-capitalised banking system.

This view effectively removes the likelihood of more extreme QE policies – negative rates, private bond purchases – and instead focussed on providing a helping hand to existing mechanisms of a floating currency and fiscal spending.

Here are the key points for investors:

  • No quantitative easing until the RBA cash rate falls to 0.25% (currently at 0.75%)
  • No negative rates – The floor for the RBA will be 0.25%
  • No private assets – QE would be restricted to Government Debt purchased in the secondary market.
  • The trigger for QE will be when “we’re moving persistently away from our targets, our target for full employment and inflation”.

What does the RBA hope to achieve?

At its core, the speech is a signal that the central bank believes greater public investment and structural reform will be enough to lower unemployment and lift inflation. It hopes that by reducing government bond rates is can achieve the following:

  • A lowering of the Australian Dollar
  • Increased Government (fiscal) spending
  • Downward pressure on interest rates (and mortgage rates)

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RBA Cash Target and Future Pricing

Diagram showing RBA Cash Target and Future Pricing

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