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  • Writer's pictureCrest Economics

Quantitative Easing: How much more money do we need? February 2021

The Reserve Bank of Australia (RBA) has doubled their government bond buying scheme to $200 billion, showing that economic recovery remains fragile. The RBA will continue ‘printing’ money through its quantitative easing program until September 2021.

With the current monetary policy reaching its lower zero bound that marks the limit of its effectiveness, the RBA has turned towards engaging in quantitative easing (QE); unconventional monetary policy. Quantitative Easing comprises of the RBA increasing the amount of credit in the economy by purchasing government bonds. These bonds represent the credit raised from private markets and are used to fund Australia’s past deficits. To put it simply, quantitative easing is the printing money out of thin air.

However, there are concerns that the RBA’s direct financing of government expenditure could ‘blur the lines between fiscal and monetary policy’, as CBA's Halmarick says buying government bonds directly is politically fraught.

However, economists say that the decision was made in response to unemployment remaining high at 6.6% with inflation stuck below the 2-3% target band at 1.34%. RBA Governor Philip Lowe has also affirmed the cash rate will remain at its record low level of 0.1% until wages growth picks up, having been subdued at below 3% for almost 7 years.

‘The RBA have set out to do all it can to boost economic activity’, Brendan Rynne, the chief economist at KPMG said. However, trouble spells from the soaring price of houses and other assets that could prompt many Australians entering negative equity or suffering from high debts when asset prices correct.

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