Today the Reserve Bank of Australia (RBA) has said that the cash rate will remain at 0.10 per cent and is expected to remain at this rate until 2024.
The RBA also revealed it would continue buying government bonds at a rate of $5 billion a week until early September. This policy is designed to boost the Australian economy and give businesses a helping hand.
What is quantitative easing?
Quantitative easing is an increasingly common form of monetary policy practised by reserve banks. The RBA and other reserve banks will more commonly alter their cash rate to either constrict or inflate the domestic economy.
Former Chief Economist of ANZ bank Saul Eslake said, “Purchasing large quantities of government bonds, and in some cases though not in Australia other types of financial assets, such as mortgage-backed securities or corporate bonds are the means that most central banks in the ‘developed’ world have chosen to provide further support for economic activity when they have reached a point where they don’t think it’s practical or feasible to cut interest rates any lower.”
The RBA’s cash rate target is at an all-time low of 0.10 per cent. This rate is the lowest it can realistically go before dipping into negative territory.
Negative cash rates have been observed around the world recently, namely in Japan and several European countries. However, there seems to be no appetite within the RBA to experiment with this kind of policy.
Instead, the RBA has chosen to continue using qualitative easing. Qualitative easing typically involves a central bank (RBA) increasing the domestic money supply by buying long-term government bonds. These bonds are purchased from commercial banks in exchange for cash. This works to increase the commercial banks’ liquidity.
In theory, more liquidity should push interest rates lower, making lending and borrowing easier. This should result in more money entering the economy and stimulating business.
Mr Eslake said, “The RBA has chosen to continue its bond purchases because it believes that they contribute to the achievement of their goals of reducing unemployment and returning ‘underlying’ inflation to its 2-3 per cent target range.
“What will have come as a surprise to some, I suspect, is that they didn’t temporarily increase the size of their bond purchases from the current $5bn a week to, say, $6bn a week for as long as the Sydney lockdown lasts – but, instead, reiterated their previous commitment to reduce those purchases to $4bn a month from mid-September through to November.”
Benefits for small business
Small business has been affected significantly more by the pandemic than larger business, in particular, service-based small business.
According to RBA data, smaller businesses are less willing to take on external finance as an option. The RBA claims that finance is seen as a large risk for smaller businesses and is viewed as unaffordable.
Mr Eslake said, “The main benefits to small businesses – as to other parts of the economy – of these policies have been lower interest rates and a more competitive exchange rate.”
Mr Eslake said on the subject of monetary policy aimed at SMEs, “The RBA would also point, of course, to the almost $190 billion it has loaned to banks and other lenders, through its Term Funding Facility, for three-years at 0.10% – which is cheaper than the banks could have raised three year money for on their own – on terms which have encouraged banks to on-lend to, in particular, small and medium-sized businesses.”
Unfortunately, he said, “As it’s turned out, businesses don’t seem to have been all that keen to take on additional borrowings – but that’s not the RBA’s fault.”
Throughout the pandemic, small business was supported primarily through fiscal policy including Jobkeeper and tax relief. However, with financial support wound back and COVID-19 still significantly impacting business, borrowing may become a tool for businesses that hadn’t before considered it.