Quantitative Easing

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EXPERT OBSERVER 

The Reserve Bank Board’s minutes for its December meeting emphasised that the Board is committed to substantial policy support for a considerable period.

The Minutes note that “Substantial policy support would therefore be required for a considerable period”.

Despite recent encouraging economic developments around the distribution of vaccines in both the US and UK and what the minutes refer to as “the recovery in the labour market was more advanced than expected” there remains significant caution with respect to the Board’s confidence in the recovery –“the unemployment rate had ticked up in recent months and broader measures of labour underutilisation remained high” – “there was still a significant amount of spare capacity in the labour market and this would remain a key policy challenge for some time”.

Overall, the sentiment from the Board is broadly unchanged, “the recovery was still expected to be uneven and protracted”.

A second outstanding theme in the minutes is the view on the housing market. The domestic housing market was described as “improving but uneven” and it was pointed out that “national housing prices had increased only a little since the outbreak of the pandemic”.

The decline in overseas migration had impacted the rental housing market with rents falling and “rental vacancy rates in inner city Sydney and Melbourne around their highest levels in many years”. There is some speculation that the authorities may see the need to slow the housing market in 2021 with some form of macro prudential policies.

Our view is that these record low rates will eventually move house prices to levels that will concern the authorities (particularly if confidence returns and the significant lift in new lending is not offset by rising repayments resulting in elevated levels of household debt) but that will be a story for 2023.

Conclusion

Yesterday we released our forecasts for the RBA’s approach to Quantitative Easing.

We expect that the current $100 billion program will be extended into a second $100 billion program before being reduced to two consecutive $50 billion programs that will see the policy covering both 2021 and 2022.

In fact, this coverage will fall a little short of the end 2022 date.

The current program which began on November 5 is described by the RBA as “approximately six months” would expire in late April/early May 2021.

We expect that will be immediately replaced by a second program of equal size and length taking the program to late October/early November 2021.

That program is expected to be replaced by a smaller, $50 billion, program of “approximately six months” to Late April/early May 2022; and finally, a fourth program to late October/early November 2022.

Two years of QE is unlikely to be currently priced into the curve but the approach set out in the December Minutes – “substantial policy support; considerable period”; “protracted recovery” all indicate that the RBA is certainly contemplating further QE.

In particular we are likely to hear more early in the new year as indicated by the Minutes, “Members agreed to keep the size of the bond purchase program under review”.
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Yesterday we forecast that the RBA Board would extend the current $100 billion QE program with a second $100 billion program (start date corrected to early May from June, 2021). The December Minutes give clear support for this view

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RBA Minutes support Westpac's QE views: Bill Evans

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Along with massive fiscal stimulus globally to deal with the impact of coronavirus shutdowns on the economy, the last month or so has also seen massive monetary easing – with the latest being the US Federal Reserve expanding its emergency lending program to $US2.3 trillion.
The economic shutdowns are necessary to slow the spread of coronavirus to take pressure off the medical system in order to minimise deaths. And because this will lead to a huge detraction in economic activity - we expect Australia and other developed countries to see a 10 to 15% fall in GDP centred on the current quarter - businesses, jobs and incomes need to be protected as far as possible through a period of hibernation so the economy can return to “normal” as quickly as possible once the shutdown ends.
Hence government measures to support businesses, jobs and incomes via wage subsidies, payments to businesses, tax relief, rent relief etc. Such measures add to more than 4% of global GDP and are still rising.  In Australia, fiscal stimulus is now up to around 10.5% of GDP and in the US it’s around 7% with more on the way.
However, monetary stimulus is also necessary to take pressure off indebted households and businesses and to ensure the flow of money and credit through the economy.
Initially some of the focus was on rate cuts, but rates were already low or around zero, and so increasingly we are seeing quantitative easing (QE) or money printing. But surely this is unnatural – money doesn’t just grow on trees? Some fret this can only lead to hyperinflation.
This note looks at what QE is and how it entails printing money, why it's being used and what the risks are.
Summary of recent moves by major central banks?
 But first here is a quick summary of recent major monetary policy easing measures since February
The Fed has cut the Fed Funds rate by 1.5% to a range of zero-0.25%, announced unlimited buying of Treasury bonds and mortgage backed securities and announced a total of $US2.3trn in lending facilities that leverages up $US454bn in risk capital (which will take losses if needed) provided by the US Government. The latter will be used to lend to small and medium enterprises (through banks) and to state and local governments and for the purchase of investment grade and some high yield bonds, collateralised loan obligations and commercial mortgage backed securities. 
The European Central Bank has reinstated quantitative easing totalling €870bn by year end with flexibility over the assets it can buy which will aid countries like Greece and Italy and expanded its low-cost bank funding program. • The Bank of England cut rates by 0.65% to 0.1% &amp; started a new £200bn bond buying program with more bank funding. 
The RBA has cut the cash rate by 0.5% to 0.25%, set a target for the 3 year bond yield of 0.25% to be supported by buying Government bonds and announced low cost funding for banks (called a Term Funding Facility) amounting to at least $90bn at just 0.25% interest for three years. These all involve quantitative easing and hence money printing.
What is quantitative easing?
Quantitative easing involves a central bank printing money and using that money to buy government and private sector securities or to lend directly or via banks to pump cash into the economy. So this covers the Fed’s bond buying program and its lending facilities and in Australia it covers the RBA’s buying of Australian Government bonds and its low-cost funding of banks.
It all shows up as an expansion in central banks’ balance sheets which shows their assets and liabilities.
The printed money or cash increases the “liability” side of the balance sheet and the increased holding of bonds, private securities, direct loans or funding of banks shows up on the “asset” side.
Rough estimates are that the moves announced over the last month or so will see the Fed’s balance sheet more than double to around $US11 trillion by year end or 50% of US GDP and the RBA’s balance sheet nearly double to around $340bn by year end or 17% of GDP. Of course, the Bank of Japan’s balance sheet dwarfs that of the Fed, ECB and RBA reflecting its massive quantitative easing program since 2012.
So why do quantitative easing? Normally central banks implement monetary policy by changing interest rates. But when interest rates have already fallen to zero, in order to support the economy central banks have been turning to boosting the quantity of money in the economy. Hence quantitative easing.
 The current expansion in quantitative easing (and its adoption in Australia) reflects: 
A need to ensure that short term money markets continue to function – as lenders became reluctant to lend into money markets last month the Fed, RBA and other central banks injected short term funds into the markets. This should be temporary and will reverse as markets settle down. 
A desire to ensure that sound businesses continue to receive funding. This has seen the Fed adopt a range of lending programs and the ECB and RBA provide low cost funding for banks so they can continue to lend to their customers. 
A desire to ensure that the cost of funding remains low. A month ago Government bond yields started to rise (as fund managers were selling their liquid winning assets to meet redemptions), corporate borrowing rates surged as investors feared defaults and Europe was seeing a blow out in the gap between bond yields of fiscally weaker countries like Italy versus Germany.
So, the Fed has been pumping money into the US bond and credit markets to push yields back down. The ECB has done something similar in Europe by buying Italian bonds. And the RBA announced a target of 0.25% for the 3-year bond yield and started buying bonds to support that target.
Keeping bond yields down means lower fixed rate borrowing rates on business loans and mortgages. 
To the extent bond buying keeps bond yields down it makes it easier for governments to fund their rising budget deficits. 
Finally, a lesson from the 1930s is that it’s very important to stop the money supply from shrinking. The 1930s saw multiple bank failures which accentuated the economic depression as people lost their savings and as a result the money supply collapsed.
Printing money and expanding cash in the system helps make sure this does not occur. But isn’t this helicopter money? What about MMT? Not quite. As currently practiced central bank bond buying involves the central bank using printed money to buy already existing government bonds in the secondary market (eg from banks, super funds and foreign investors).
So, it’s not directly providing the money to the government and those bonds must (at least in theory) still be paid back when they mature. So, it’s not really “helicopter money” – which would see a central bank directly give money to the government to spend.
Modern Monetary Theory (MMT) argues that if a country borrows in its own currency (which Australia does - so there is no risk of a currency crisis) and there is more risk of deflation than inflation then there is nothing wrong with using money printing to finance government spending which can be allocated in an equitable way.
I must admit I have some sympathy for this. The trouble is that politicians would be at risk of becoming addicted to the flow of central bank money resulting in wasteful government spending and pork barrelling and eventually hyperinflation.
So central banks &amp; governments are very wary of doing this. At least for now - as this resolve may fade the longer inflation remains very low. But of course, QE is aiding the government’s stimulus program by helping to keep bond yields down. And unlike in the period of quantitative easing seen in the US and Europe last decade which was accompanied by fiscal austerity, exploding budget deficits today provide a vehicle for quantitative easing to add to spending in the economy (once the shutdowns relax) so QE today is likely to be far more potent than it was last decade.
 How will central banks get their balance sheets down?
There is no magical right or wrong level for a central bank’s balance sheet - as can be seen in the chart above they vary as a share of GDP from country to country.
So, it’s not necessarily the case that central banks will need to shrink them (beyond the shrinkage that may occur when their lending and low cost bank funding programs end) – they could just remain at a permanently higher level with central banks just rolling their bond holdings over as bonds mature meaning effectively that governments may never need to pay a portion of their debt back. And in the process the interest governments pay on such debt could come back to them as a “dividend” payment from the central bank!
Won’t it just cause hyperinflation?
The biggest risk in this whole strategy is that the expansion of the money supply results in a surge in inflation. Early last decade when QE became popular there was much talk of hyperinflation and the US becoming the next Zimbabwe, but it didn’t because while narrow measures of money (cash and bank reserves) surged, broader money supply measures like credit growth remained subdued and at the same time spare capacity in the economy remained high.
The same will likely apply now in the short term – until economic activity recovers to more normal levels such that spare capacity is used up (with unemployment falling and factories operating at full capacity) and lending growth picks up substantially it’s hard to see inflation picking up. If anything, inflation looks likely to fall – just look at the plunge in oil and petrol prices, the slump in demand for discretionary retail products and all the talk of falling wages.
Once economic activity has recovered there is a bigger risk of inflation and central banks may have to reverse easy money. But that’s an issue for some time away. We still have to end the shutdowns, and all go back to work and spending first. What does it all mean for investors? There are several implications in all this for investors.
First, because the coronavirus shutdown has created such a big hit to economic activity which will take a while to fully recover from, low interest rates and easy monetary policy will likely be with us for a long time to come and once the growth outlook improves this is a positive for growth assets like shares.
Second, the country that expands its balance sheet and by implication its money supply the fastest seems likely to see a decline in its currency. Based on our balance sheet calculations the Fed looks to be leading the charge here – which could be negative for the US dollar. This may ultimately support commodity prices and the $A once the shutdowns end.
Third, ultimately ultra-easy money, huge budget deficits and public debt and an ongoing retreat from globalisation will add to the risk of an eventual pick-up in inflation which would be negative for bonds – but that’s still several years away.
SHANE OLIVER is the Head of Investment Strategy and Chief Economist at AMP Capital
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QE & money printing, what is their place in the COVID-19 economic rescue? Shane Oliver

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EXPERT OBSERVER
As part of an ongoing effort to minimize the impact on the economy from coronavirus related shutdowns the RBA announced that it will do the following today:
1. Cut the cash rate by another 0.25% to a new record low of 0.25%. This is likely to be the floor based on past RBA comments that point to little benefit in going to zero or negative. The RBA also committed not to raise the cash rate until progress is made towards full employment and it is confident that inflation will sustainably meet the 2-3% target.
- This is aimed at further lowering short term borrowing costs in the economy and signalling to borrowers and lenders that rates will stay down for a long time.
2. Set a target of 0.25% for 3 year bond yields to be achieved through the RBA buying Government bonds. This is quantitative easing in that it will involve the use of printed money to buy bonds. Unlike in the US and Europe a target has not been set as to the amount of bonds to be purchased.
- This is aimed mainly at lowering longer term borrowing costs in the economy, such as fixed mortgage rates. The increase in the supply of Australian dollars will also put more downwards pressure on the $A. While the three year rate influences much funding in the economy, it would have made sense to also target the 10 year bond yield which has shot up to 1.5% as it plays a big role in Federal Government borrowing which will rise sharply in the months ahead.
3. Cheap funding for banks for three years at 0.25% with an initial amount of $90bn. Banks can obtain an initial amount of up to 3% of their outstanding loans and then additional amounts if they increase business lending particularly to small and medium sized businesses.
- This is aimed at making sure banks have plenty of funding in the difficult times at present, lowering the cost of funding for banks so they in turn can lower their lending rates and encouraging lending to businesses.
4. Finally bank settlement accounts at the RBA will receive an interest rate of 0.1%, up from zero.
- This is aimed at reducing the cost to banks of holding increased settlement balances at the RBA.
The extraordinary announcements from the RBA today are in response to the turbulence now being seen in financial markets as a result of the shutdown to parts of the global and Australian economies on the back of the coronavirus pandemic. In addition APRA has announced an easing in banks' capital rules. They will combine with further Government measures to be announced in the days ahead to support businesses, households and the economy.
They won't stop the virus, the hit to the economy from the shutdowns and the associated recession. But they should help minimise the fall out in terms of jobs, incomes and businesses such that we can recover more quickly once the virus comes under control.
Its likely though that more action will be needed and until we get clear evidence that the virus is coming under control its too early to say that share markets and the Australian dollar have bottomed.
SHANE OLIVER is the Head of Investment Strategy and Chief Economist at AMP Capital
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RBA cuts cash rate, starts QE & provides cheap bank funding: Shane Oliver

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EXPERT OBSERVER
Australia’s public finances remain in good shape with the Federal Government on course to deliver its first Budget surplus in 12 years. But new spending measures since the April 2 Budget and the 2019 Pre-election Economic and Fiscal Outlook (PEFO) have been limited at a time when Australia’s annual economic growth rate has slowed to decade lows.
Prior to the release of today’s Mid-Year Economic and Fiscal Outlook (MYEFO), the Federal Government claimed that around $9.5 billion worth of stimulus had already been rolled out over the next two years - including income tax cuts, drought-relief and infrastructure spending. The MYEFO included new net spending of $8 billion over the next four years.
So what is driving Australia’s solid Budget position? Fiscal discipline. The Government claims real spending growth of just 1.3 per cent is around the lowest in 50 years and payments as a share of GDP at 24.5 per cent are below the 30-year historical average of 24.7 per cent. In fact, spending is $1.4 billion lower this fiscal year. The annualised deficit in the year to October (latest available) is just $78 million, suggesting that a surplus is tantalisingly close – even if the government doesn’t increase spending considerably.
Also, our exporters are going gangbusters. The weaker Aussie dollar, reduced seaborne supply out of Brazil and Chinese stimulus have boosted demand for steel-making ingredient iron ore, keeping ferrous prices elevated. And with most commodity prices higher, Australian miners - which account for around 40 per cent of total company profits - have lifted overall company tax revenue. In fact, company profits were up 10.2 per cent over the year to September to record highs. That said, overall company tax revenues are still expected to be down by $700 million this fiscal year and almost $8 billion over the forward estimates.
The estimated Budget surplus has been revised down from $7.1 billion to $5.0 billion this fiscal year; downgraded from $11 billion to $6.1 billion in 2020/21; and lower by $9.4 billion to $8.4 billion in 2021/22. Sluggish economic growth and tepid wages growth have weighed on GST receipts (down $1.8 billion in 2019/20) through lower consumer spending. And lower superannuation taxes paid and non-tax revenues have also lowered revenue by $32.6 billion over the 4-year forward estimates.
As expected, the Government has downgraded its near term forecasts for economic growth, inflation, wages growth and business investment in the near term. But the unemployment rate is expected to remain steady around current levels of 5.3 per cent. And Federal Treasurer Josh Frydenberg has stressed that “the outlook for the Australian economy is positive”, with economic activity expected to return to its long-run average growth of 3 per cent by 2021/22, supported by personal income tax cuts and infrastructure spending.
Petrol prices are irritatingly high across Australia at the moment. Unleaded retail petrol prices have hit peaks near $1.75 a litre in major capital cities in the past week – well above the national wholesale or Terminal Gate Price (TGP) of around $1.35 a litre. Prices are set to gradually ease by the weekend, but will remain elevated at $1.60-$1.70 a litre for most of this week. Of course, the timing couldn’t be worse. Most of us are about to hit the road for summer holidays and there is increased traffic on the road as the ‘mad dash’ for the shopping malls and Christmas parties continue. Airport drop-offs and pick-ups are also increasing too in the lead-up to New Year.
So why are petrol prices so high? Australia is a net importer of oil and the weaker Aussie dollar against the greenback has pushed up the cost of refined petroleum product from Singapore this year. Oil charges have also lifted at a time when crude oil prices are hovering near 3-month highs. Supply restraint by OPEC and Russia along with better demand sentiment associated with the US-China trade truce have pushed up crude oil prices.
What do the figures show?
Mid-Year Economic and Fiscal Outlook (MYEFO) 2019/20
The Federal Government is projecting a $5.0 billion underlying cash surplus (0.3 per cent of GDP) for the current financial year. The April 2019 Budget had forecast a surplus this fiscal year of $7.1 billion. A Budget surplus of $6.1 billion (0.3 per cent of GDP) is now expected in 2020/21. By 2021/22, the surplus is expected to be $8.4 billion or 0.4 per cent of GDP, before falling to a forecast surplus of $4.0 billion or 0.2 per cent of GDP in 2022/23.
The net operating balance is expected to be in surplus by $8.0 billion this fiscal year (2019/20). The April Budget had forecast a $12.9 billion surplus this year. The surplus is forecast to lift to $12.1 billion in 2020/21.
Debt: Net debt is projected to be $392.3 billion in 2019/20 or 19.5 per cent of GDP. Net debt is expected to fall to $379.2 billion (18.4 per cent of GDP) in 2020/21 then $360.8 billion (or 16.0 per cent of GDP) by 2022/23.
Gross debt, in per cent of GDP terms, is estimated to decline from 27.7 per cent of GDP in 2019/20 to 25.5 per cent of GDP by the end of the forward estimates.
Revenue: Since the 2019 Pre-election Economic &amp; Fiscal Outlook (PEFO), expected total receipts have been revised down by around $3.0 billion in 2019/20 and $32.6 billion over the four years to 2022-23. The near-term downward revisions are largely attributable to downgrades to superannuation fund taxes, GST and non-tax receipts. Downward revisions from 2020/21 to 2022/23 reflect falling individual taxes, company tax and GST receipts. Tax receipts are projected to remain below the Government’s tax-to-GDP cap of 23.9 per cent over the medium term.
Expenses: The payments-to-GDP ratio is expected to be 24.5 per cent in 2019/20, rising to 24.8 per cent by 2020/21, near the 30-year historical average of 24.7 per cent. Average annual real growth in payments is expected to be 1.3 per cent across the forward estimates.
Policy decisions: Since the 2019 PEFO, new policy decisions in the 2019/20 MYEFO have reduced payments by $1.3 billion over the four years to 2022/23. And the estimated impact over the forward estimates of remaining unlegislated Budget repair measures, announced prior to the 2019/20 MYEFO - after taking account of parameter changes - is now +$4.9 billion. This comprises around $2.3 billion of receipt increases and around $2.5 billion of payment savings.
Commodity assumptions: The iron ore spot price is assumed to remain at US$55 per tonne free-on-board (FOB) over the forecast period. The metallurgical coal price is assumed to remain around current levels of US$134 per tonne FOB over the forecast period, below the assumed by the 2019 PEFO of US$150 per tonne FOB. The thermal coal price is assumed to be US$64 per tonne FOB over the forecast period, below the 2019 PEFO assumption of US$91 per tonne FOB.
Economic outlook: Economic (real GDP) growth is forecast to be 2.25 per cent in 2019/20, down from 2.75 per cent estimated in the April Budget. Real GSP growth is forecast to lift to 2.75 per cent in 2020/21 and 3 per cent annually by 2021/22. Wage growth, which was forecast at 2.75 per cent in the April Budget, has been downgraded to a weaker 2.5 per cent for the next two years, with the government not forecasting a return to 3 per cent growth until 2022/23. Inflation forecasts have also been lowered by 25 basis points to 2.0 per cent this fiscal year (2019/20) and 2.25 per cent in 2020/21. The unemployment rate has been revised up to 5.25 per cent over the next couple of fiscal years before falling to 5 per cent in 2021/22 and 2022/23. Estimated business investment is now forecast to be 1.5 per cent this fiscal year, down from the 5 per cent projected in the 2019 PEFO.
Credit rating implications: S&amp;P Global Ratings has reiterated that it expects the Government to maintain strong fiscal discipline and policy settings in order to retain Australia’s prized sovereign AAA credit rating.
Petrol prices
According to the Australian Institute of Petroleum, the national average price of unleaded petrol rose by 9.9 cents to 154.8 cents a litre last week. The metropolitan price rose by 14.5 cents to 157.8 cents a litre and the regional price lifted by 0.6 cents to 148.6 cents a litre.
Average unleaded petrol prices across states and territories over the past week were: Sydney (up 20.6 cents to 159.2 c/l), Melbourne (up 20.7 cents to 161.1 c/l), Brisbane (up 26.0 cents to 168.3 c/l), Adelaide (down 18.5 cents to 142.9 c/l), Perth (down 0.6 cents to 145.6 c/l), Darwin (down 0.6 cents to 142.1 c/l), Canberra (unchanged at 147.7 c/l) and Hobart (unchanged at 156.0 c/l).
The smoothed gross retail margin (2-month rolling average) for unleaded petrol rose from 13.51 cents a litre to 15.00 cents a litre (24-month average: 13.2 cents a litre).
The national average diesel petrol price was unchanged at 149.0 cents a litre over the week. The metropolitan price fell by 0.1 cent to 147.5 cents a litre and the regional price was flat at 150.2 cents a litre.
Today, the national average wholesale (terminal gate) unleaded petrol price stands at 134.6 cents a litre, down by 0.1 cent over the week. The terminal gate diesel price stands at 137.1 cents a litre, up by 1.0 cent over the past week.
MotorMouth records the following average retail prices for unleaded fuel in capital cities today: Sydney 163.3c; Melbourne 164.4c; Brisbane 167.4c; Adelaide 166.5c; Perth 135.0c; Canberra 147.6c; Darwin 142.1c; Hobart 156.0c.
The key Singapore gasoline price fell by US$2.58 or 3.4 per cent last week to US$73.65 a barrel. In Australian dollar terms, the Singapore gasoline price fell by $5.13 or 4.6 per cent to $106.34 a barrel or 66.88 cents a litre.
Purchasing managers’ survey - December
The Commonwealth Bank/IHS Markit ‘flash’ purchasing manager (PMI) survey for manufacturing fell from 49.9 points in November to a 3½-year low of 49.4 points in December. The services index fell from 49.7 points in November to 49.5 points in December. Any reading below 50 indicates a contraction of activity.
According to the Commonwealth Bank, “The PMI readings indicate that the Australian economy ended 2019 on a softish note. The RBA’s “gentle turning point” for the economy remains elusive. And the weakness in private spending evident in the Q3 GDP data looks to have continued in Q4, with a flow on to labour demand as well. There were also some early indications that the disruptions associated with the terrible bushfires around Sydney and elsewhere are having some impact”. New orders continue to rise, however, indicating a degree of resilience in the domestic economy. The rise in new export business also indicates a degree of resilience to the sluggish global backdrop”.
Chinese economic data - November
Retail sales rose at an 8.0 per cent annual rate in the year to November (consensus: +7.6 per cent), up from the 7.2 per cent annual rate in the year to October.
Industrial production rose at a 6.2 per cent annual rate in November (consensus: +5.0 per cent). Production had risen by 4.7 per cent in the year to October.
Fixed-asset investment rose by 5.2 per cent in the 11 months to November on a year earlier (consensus: +5.2 per cent), unchanged from the 5.2 per cent lift recorded over the 10 months to October - the weakest annual growth rate since records began in 1998.
Property investment rose by 10.2 per cent in the 11 months to November on a year earlier, down from the 10.3 per cent annual growth rate in October.
The unemployment rate (nationwide survey-based jobless rate) was steady at 5.1 per cent in November.
What are the implications for interest rates and investors?
Commonwealth Bank Group economists expect another interest rate cut by the Reserve Bank of Australia in February 2020. It appears that Governor Philip Lowe’s pleas for significant fiscal easing in today’s MYEFO have ‘fallen on deaf ears’.
Aussies are pessimistic at the moment with consumer and business confidence both in the doldrums. The export and government sectors are propping up the economy, but businesses and consumers remain on a spending strike. So an even greater fiscal response appears necessary - to complement record low interest rates - in order to cajole businesses to invest and hire with consumers currently banking tax cuts and paying down debt.
The Federal Government’s solid fiscal position gives it scope to lift spending to support economic growth when it hands down the May 2020 Budget. Aside from ‘big ticket’ public transport infrastructure projects, perhaps greater attention should be given to providing tax relief for small businesses? The asset write-off threshold could be lifted further (to above $30,000) and tax cuts (to 25 per cent) brought forward from 2021/22.
And with stamp duty money from the buoyant property market filling the coffers again, payroll tax exemptions should be a top priority for state governments – especially for agricultural and manufacturing-focused businesses. The drought continues to weigh on farm GDP and manufacturing activity is contracting by the most in 3½ years.
China’s economy appears to be stabilising into year-end. A big lift in industrial production and retail spending along with a bottoming in fixed asset investment suggests that stimulus may finally be working. The better-than-expected data dump comes after the US-China trade détente announced on Friday. While a roll-back in tariffs appears unlikely until at least February, the partial trade agreement at least provides greater certainty to businesses and may boost investment.
While Chinese authorities have maintained their desire to keep economic growth within a “reasonable range” at last week’s top level government meetings, the annual economic growth target is still expected to be adjusted lower to around 6 per cent in 2020. But in good news for Australia, it appears the policymakers plan to spend even more on infrastructure next year to stabilise growth.
CRAIG JAMES is the Chief Economist at CommSec
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Budget on path to surplus but no fiscal easing: CommSec's Craig James

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Experts predict the Reserve Bank of Australia (RBA) will take unconventional measures to stimulate the economy in 2020, according to the latest survey data from Finder.
In their most recent <a href="https://www.finder.com.au/rba-cash-rate" target="_blank">Finder RBA Cash Rate Survey™</a> – 33 experts and economists weighed in on future cash rate moves and economic indicators, including wage growth and housing affordability.
While economists almost universally expected no cut in December, many experts are forecasting a cut in February. This may be the last for a significant period, with three-quarters (73%) of economists saying a 0% cash rate is unlikely.
RBA Governor Phillip Lowe recently insisted that the federal bank had ‘no appetite’ for quantitative easing (QE), a process where the central bank creates new cash to decrease – or ease – the cost of borrowing.
But nearly half (46%) of experts said it was likely we’d see QE in 2020.
Graham Cooke, insights manager at Finder, said “The RBA said they may look to alternative stimulus methods once the rate hits 0.25%."
“We’re only two cuts away from that, and the three cuts of 2019 have failed to stimulate anything beyond the housing market,” Cooke said.
Click <a href="https://lh5.googleusercontent.com/02a-7JJna6IjqWtAijhZ6rm8W27bou3occx5_PFIeSABS_nb_aiZDZrQrSHUO-dztGbQ2TqccNgDB2tW8J3bBb67RMGMAEcBcM0Kcv6rE9az54GkaxiuiPqsohHaKb_fW7NyRYjm" target="_blank">here</a> to enlarge:
<img src="https://lh5.googleusercontent.com/02a-7JJna6IjqWtAijhZ6rm8W27bou3occx5_PFIeSABS_nb_aiZDZrQrSHUO-dztGbQ2TqccNgDB2tW8J3bBb67RMGMAEcBcM0Kcv6rE9az54GkaxiuiPqsohHaKb_fW7NyRYjm">
On the bright side, a recession looks increasingly unlikely in 2020, with 89% of experts not expecting an economic decline and 88% thinking it unlikely that house prices will fall.
Three quarters of experts (76%) don’t foresee a significant rise in mortgage defaults, 64% think a US-China trade deal is likely and 52% say it is likely that house prices will fully recover.
Cooke said the positive outlook on China is significant because the fate of the US-China trade deal was cited as economists’ number one economic concern in the August survey this year.
While nearly all experts and economists predict a hold in December (97%, 32/33), two-thirds (66%, 22/33) expect the cash rate to drop to 0.50% in February 2020. This figure reflects the 64% of experts who predicted February would be a cut in last month’s survey. 
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Nearly half of surveyed experts forecast quantitative easing in 2020: Finder

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EXPERT OBSERVER 
In last week’s note we opined that the Effective Lower Bound (ELB) for the RBA’s cash rate is 0.5% which we expected to be reached in February next year.
After that point we argued that the RBA would assess that the benefits to the currency and household cash flows from further cuts were likely to be offset by unintended consequences such as a negative impact on confidence of very low rates, financial instability, and a lowering of inflationary expectations as agents associated ultra-low rates with falling inflation.
We pointed out that our forecasts indicate that by that time, it seemed unlikely that the RBA would be satisfied that the economy was moving towards full employment, its potential growth rate, and inflation within the 2–3% band.
The RBA would also be concerned that with inflation still stuck below 2% and acknowledging that no further monetary policy action would be forthcoming, this would also encourage falling inflationary expectations as agents would sense that the RBA had run out of options.
Another risk in these circumstances might be that traders would also choose to bid up the AUD in the context of a dormant central bank.
Such a time might be appropriate for the Bank to consider unconventional monetary policies.
The Governor has publicly dismissed negative interest rates as an option but has indicated that, were the RBA to embark on a course of unconventional monetary policy, an asset purchase program would be the most likely policy option.
These programs have been used in other jurisdictions over the period 2008 to 2017.
Between 2008 and 2012 the programs were aimed at addressing disruptions in liquidity in the financial markets. They covered intervention in public sector bonds, commercial paper, agency debt, agency Mortgage Backed Securities, corporate bonds, and bank covered bonds.
From that point on, programs were aimed explicitly at monetary accommodation (with the Fed’s 2019 purchase plan to address overnight funding market issues).
In Australia’s current circumstances, given that Australian banks are flush with liquidity, any action from the RBA would be directed at monetary accommodation.
Read the full report: <a href="https://westpaciq.westpac.com.au/wibiqauthoring/_uploads/file/Australia/2019/October/er20191025BullQEStrategy.pdf" target="_blank">'RBA options for QE Strategy' (PDF 144kb)</a>
BILL EVANS is the Chief Economist at Westpac
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Options for effective Quantitative Easing strategy for the RBA: Bill Evans

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EXPERT OBSERVATION
A very quiet week for data saw the spotlight again fall on central banks, particularly the RBA and ECB.
This week, there were two speakers from the RBA: first Assistant Governor (Financial Markets) Christopher Kent; then Governor Phillip Lowe. The Assistant Governor's speech was focused on the Committed Liquidity Facility, its role within the economy and recent changes the RBA has made. These remarks have no immediate significance for monetary policy and economic momentum. However, during Q&amp;A, Assistant Governor Kent noted that the RBA was unlikely to adopt unconventional monetary policy measures, while making clear the RBA had considered a number of policies implemented elsewhere from the perspective of what would be most effective in Australia.
Arguably the RBA believe they are unlikely to deliver unconventional easing because they regard the outlook as "reasonable", and also believe they still have scope to support the economy through conventional means. This was highlighted in the Governor's subsequent speech. Governor Lowe was constructive on the outlook, noting that the "foundations of the Australian economy remain strong" and that the "two recent reductions in the cash rate will support demand... [as will] recent tax cuts, higher commodity prices, [and] some stabilisation in the housing market. Further, "if demand growth is not sufficient, the Board is prepared to provide additional support by easing monetary policy further", while "other arms of public policy could also play a role".
Westpac continues to see greater risk to the outlook, believing that activity growth and inflation will disappoint the RBA's expectations. Recent data for the labour market and consumer sentiment have supported our economic view, so too the stickiness of the Australian dollar, which has failed to depreciate in response to the June/ July rate cuts.
As a result, as highlighted by Chief Economist Bill Evans, we believe the case for a third cash rate cut to 0.75% will now be made by October (following two more labour market prints and June quarter GDP), and more importantly that there will be a need for a fourth cut to 0.50% come February 2020. In recent days, markets have quickly gravitated towards our view, pricing roughly an extra 7bps in the IB curve, seeing a third cut in October fully priced and a 0.59% expected cash rate at February 2020 – indicating the likelihood of a fourth cut.
To ensure the effectiveness of the cut to 0.50%, we also see the possibility of the RBA adopting a package of other measures to aid pass-through. Chief Economist Bill Evans has outlined an example of this concept, using the experience of the Bank of England. However, we note that any unconventional easing undertaken by the RBA must suit Australian circumstances. It is important to note that we do not believe this possibility for unconventional easing is in conflict with the remarks of Assistant Governor Kent. This is because we see such a course of action only eventuating after a material economic disappointment, and only to guarantee the effectiveness of conventional monetary policy, i.e the rate cut to 0.5%, not to move market rates lower in their own right. It is also important to emphasise that the rate cut we envisage in February is not conditional on an associated package of other policies being adopted.
For their own reasons, Westpac New Zealand economics have also updated their policy view this week, now seeing a second rate cut from the RBNZ to 1.00%, most likely in November. In short, the New Zealand economy has disappointed of late, and there are concerns over business sentiment and its potential impact on investment and employment. This is in addition to global uncertainties and sector-specific weakness in forestry. Importantly, our New Zealand team continue to believe these cuts will prove effective and will see growth strengthen come 2020.
On the broader global backdrop, this week saw the IMF revise down their global growth view for 2019 and 2020 on weakness in emerging and developing markets. The scale of these revisions was immaterial, but they highlight that momentum continues to deteriorate and that risks remain skewed to the downside. The latest Markit PMI data for Europe and the US also confirmed a further loss of momentum in manufacturing. Euro Zone manufacturing momentum is the worst it has been in seven years, and for the US, nearly ten.
The July ECB meeting largely met expectations through indicating the deposit rate is very likely to be cut at their September 12 meeting and that other stimulus measures are on the table. While the July meeting does not involve updated projections, President Draghi noted the outlook is getting "worse and worse". The Governing Council note data continues "to point to somewhat slower growth in the second and third quarters of this year. This mainly reflects the ongoing weakness in international trade in an environment of prolonged global uncertainties, which are particularly affecting the euro area manufacturing sector."
The detail on other potential stimulus measures is not clear cut, but the Council are clearly making preparations in the context of responding to the medium term inflation outlook disappointing. We continue to believe that a cut will be delivered in September, but now expect a broader stimulus package will also soon be introduced. This is in response to the particularly bad run of data over recent weeks, in particular the ECB Bank Lending survey. The new package is likely to include a tiered deposit rate to mitigate the pressure on banks and see asset purchases of sovereign bonds restarted. Our expectation is for the ECB to introduce a €30bn per month program in December lasting for a year, at this stage.
Ahead next week, for Australia we receive the June quarter CPI report. And in the US, there is the all-important July FOMC meeting, which is expected to result in a 25bp rate cut.
ELLIOT CLARKE is a senior economist at Westpac.
SIMON MURRAY is an economist at Westpac 
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The RBA is unlikely to adopt unconventional monetary policy measures: CoreLogic's Elliot Clarke

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GUEST OBSERVATION
With its official cash rate now expected to fall below 1% to a new extraordinarily low close to zero, all sorts of people are saying that the Reserve Bank is in danger of “<a href="https://www.reuters.com/article/us-australia-economy-rba-analysis/australias-shrinking-monetary-policy-arsenal-tests-rbas-orthodoxy-idUSKCN1S90CL" target="_blank">running out of ammunition</a>”. Ammunition might be needed if, as during the last financial crisis, it needs to cut rates by several percentage points.
This view assumes that when the cash rate hits zero there is nothing more the Reserve Bank can do.
The view is not only wrong, it is also dangerous, because if taken seriously it would mean that all of the next rounds of stimulus would have to be come from fiscal (spending and tax) policy, even though fiscal policy is probably ineffective long-term, its effects being <a href="https://www.mercatus.org/publication/why-fiscal-multiplier-roughly-zero-0" target="_blank">neutralised by a floating exchange rate</a>.
The experience of the United States shows that Australia’s Reserve Bank could quite easily take measures that would have the same effect as cutting its cash rate a further 2.5 percentage points – that is: 2.5 percentage points below zero.
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Reserve Bank cash rate since 1990
<a href="https://images.theconversation.com/files/277841/original/file-20190604-69059-1j2m4r9.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=1000&amp;fit=clip"><img src="https://images.theconversation.com/files/277841/original/file-20190604-69059-1j2m4r9.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" alt=""></a>
<a class="source" href="https://www.rba.gov.au/media-releases/2019/mr-19-15" target="_blank">Reserve Bank of Australia</a>
In a report <a href="https://www.ussc.edu.au/analysis/lessons-from-quantitative-easing-in-the-united-states-a-guide-for-australian-policymakers" target="_blank">released on Tuesday</a> by the University of Sydney’s United States Studies Centre, I document the successes and failures of the US approach to so-called “quantitative easing” (QE) between 2009 and 2014.
It demonstrates that it is always possible to change the instrument of monetary policy from changes in the official interest rate to changes in other interest rates by buying and holding other financial instruments such as long-term government and corporate bonds.
<img src="https://images.theconversation.com/files/279752/original/file-20190617-118539-fe387p.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=237&amp;fit=clip" alt="">
Australia can learn form US mistakes. <a class="source" href="https://www.ussc.edu.au/analysis/lessons-from-quantitative-easing-in-the-united-states-a-guide-for-australian-policymakers" target="_blank">University of Sydney United States Studies Centre</a>
The more aggressively the Reserve Bank buys those bonds from private sector owners, the lower the long-term interest rates that are needed to place bonds and the more former owners whose hands are filled with cash that they have to make use of.
In the US the Federal Reserve also used “<a href="https://www.federalreserve.gov/monetarypolicy/timeline-forward-guidance-about-the-federal-funds-rate.htm" target="_blank">forward guidance</a>” about the likely future path of the US Federal funds rate to convince markets the rate would be kept low for an extended period.
It is unclear which mechanism was the most powerful, or whether the Fed even needed to buy bonds in order to make forward guidance work. However in a stressed economic environment, it is worth trying both.
As it comes to be believed that interest rates will stay low for an extended period, the exchange rate will fall, making it easier for Australian corporates to borrow from overseas and to export and compete with imports.
The consensus of the academic literature is that QE cut long-term interest rates by around one percentage point and had economic effects equivalent to cutting the US Federal fund rate by <a href="https://www.ussc.edu.au/analysis/lessons-from-quantitative-easing-in-the-united-states-a-guide-for-australian-policymakers" target="_blank">a further 2.5 percentage points</a> after it approached zero.
QE need not have limits…
Based on US estimates, Australia’s Reserve Bank would need to purchase assets equal to around 1.5% of Australia’s Gross Domestic Product to achieve the equivalent of a 0.25 percentage point reduction in the official cash rate. That’s around A$30 billion.
With over A$780 billion in long-term government (Commonwealth and state) securities on issue, there’s enough to accommodate a very large program of Reserve Bank buying, and the bank could also follow the example of the Fed and expand the scope of purchases to include non-government securities, including residential mortgage-backed securities.
It could also learn from US mistakes. The Fed was slow to cut its official interest rate to near zero and slow to embark on QE in the wake of the 2008 financial crisis. Its first attempt was limited in size and duration. Its success in using QE to stimulate the economy should be viewed as the lower bound of what’s possible.
…even if it becomes less effective as it grows
It often <a href="https://www.propertyobserver.com.au/https://www.abc.net.au/news/2019-06-16/interest-rates-are-going-down-but-how-low-can-they-go/11210682" target="_blank">suggested</a> (although it is <a href="https://www.rba.gov.au/publications/confs/2017/borio-hofmann" target="_blank">by no means certain</a>) that monetary policy becomes less effective when interest rates get very low, but this isn’t necessarily an argument to use monetary policy less. It could just as easily be an argument to use it more.
Because there is no in-principle limit to how much QE a central bank can do, it is always possible to do more and succeed in lifting inflation rate and spending.
Fiscal policy may well be even less effective. To the extent that it succeeds, it is likely to push up the Australian dollar, making Australian businesses less competitive.
US economist <a href="https://www.mercatus.org/publication/why-fiscal-multiplier-roughly-zero-0" target="_blank">Scott Sumner</a> believes the extra bang for the buck from government spending or tax cuts (known as the multiplier) is close to zero.
Reserve Bank Governor Philip Lowe this month appealed for <a href="https://www.rba.gov.au/speeches/2019/sp-gov-2019-06-04" target="_blank">help from the government itself</a>, asking in particular for extra spending on infrastructure and measures to raise productivity growth.
He is correct in identifying the contribution other policies can make to driving economic growth. No one seriously thinks Reserve Bank monetary policy can or should substitute for productivity growth.
But it is a good, perhaps a very good, substitute for government spending that does not contribute to productivity growth.
Three myths about quantitative easing
In the paper I address several myths about QE. One is that it is “printing money”. It no more prints money than does conventional monetary policy. It pushes money into private sector hands by adjusting interest rates, albeit a different set of rates.
Another myth is that it promotes inequality by helping the rich to get richer.
It is a widely believed myth. Former Coalition treasurer <a href="https://www.afr.com/news/economy/monetary-policy/murdoch-criticises-central-bank-stimulus-20141017-119n1f" target="_blank">Joe Hockey</a> told the British Institute of Economic Affairs in 2014 that: "Loose monetary policy actually helps the rich to get richer. Why? Because we’ve seen rising asset values. Wealthier people hold the assets."
But it widens inequality no more than conventional monetary policy, and may not widen it at all if it is successful in maintaining sustainable economic growth.
A third myth is that it leads to excessive inflation or socialism.
In the US it has in fact been associated with some of the lowest inflation since the second world war. These days central banks are more likely to err on the side of creating too little inflation than too much.
Some have argued that QE in the US is to blame for the rise of left-wing populists like Alexandria Ocasio-Cortez and “<a href="https://realconservativesunite.com/2019/03/07/ben-bernanke-the-father-of-extreme-us-socialism/" target="_blank">millennial socialism</a>”. But it is probably truer to say that their grievances grew out of too tight rather than too lose monetary policy.
QE has been road tested. We’ve little to fear from it, just as we have had little to fear from conventional monetary policy.<img src="https://counter.theconversation.com/content/118843/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1" style="border: none !important; box-shadow: none !important; margin: 0 !important; max-height: 1px !important; max-width: 1px !important; min-height: 1px !important; min-width: 1px !important; opacity: 0 !important; outline: none !important; padding: 0 !important; text-shadow: none !important;">
Stephen Kirchner, Program Director, Trade and Investment, United States Studies Centre, University of Sydney
This article is republished from <a href="http://theconversation.com" target="_blank">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/below-zero-is-reverse-how-the-reserve-bank-would-make-quantitative-easing-work-118843" target="_blank">original article</a>.
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How the Reserve Bank would make quantitative easing work

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<div class="column">GUEST OBSERVER</div>
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<div class="column">We consider the reasons why the RBA may consider implementing Quantitative Easing (QE).</div>
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<div class="column">There would need to be a sharp downturn in economic activity which is not in our forecasts.</div>
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<div class="column">Some QE options are more likely than others, based on other central bank experiences and the nature of Australia’s financial system. Negative interest rates look unlikely.</div>
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<div class="column">We believe that the RBA sees the Effective Lower Bound (ELB) for the cash rate to be around 1.0%.</div>
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<div class="column">We do not believe that the Zero Lower Bond (ZLB) will happen here.</div>
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<div class="column">A lower Australian dollar (AUD), say below USD0.70, is preferred because it will obviate the need for QE.</div>
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Overview 
The RBA cash rate is currently at a record lows and, in our view, set to go slightly lower. Our forecast is for a 25 basis point rate cut in November, bringing the RBA cash rate to a new record low of 1.25% after the September quarter inflation update. But conventional monetary policy is reaching its limits here. While real GDP growth is close to decade averages, inflation and wages are still trending lower. So a cash rate of 1.0% is a clear possibility. But that could be the low point, or the ELB, before unconventional monetary policies (UMPs), like QE, are introduced here. 
Why are rates being cut to such low levels? Essentially it is because inflation is very low. However, low interest rate are not lifting activity where it is most required. Namely, in non-resources business investment. Ever lower cash rates are required because economic growth rates can be significantly higher than they currently are in order to return inflation to the target range of 2-3%. 
The “neutral cash rate” – the one where full employment co-exists with mild inflation - is clearly moving lower since the Global Financial Crisis (GFC). It has not stabilised. This is a global phenomenon and in the US the Fed currently believes the real neutral Fed funds rate has declined to zero.1 
However, one of the costs of low interest rates is overstimulation of the housing market, necessitating APRA’s macro-prudential new controls over lending to home buyers and developers. We suspect there may be another tweak of the controls if the risks around the housing sector are not abating sufficiently quickly. Housing credit growth is moderating but offshore capital flows into local residential and commercial property remain relatively strong. State government tax hikes on foreign investors’ residential investment are a recent development. Higher property taxes usually slow investment activity. 
UMPs, like QE, have been used effectively since the GFC, to stimulate activity and overcome the lack of liquidity in parts of the financial system. Research from other central banks indicates that it has been effective in lowering longer term interest rates and flattening interest rate curves.2 But that the costs may rise if QE remains in place for an extended period. 
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Of course, Australia’s monetary policy arrangements are not the only factor influencing domestic activity and the level of the Australian Dollar (AUD). They are not done in complete isolation in a world of open capital flows and floating currencies. 
If the US Fed proceeds to lift interest rates later this year, then the effect should be to lift the USD and lower the AUD. A lower AUD, say near USD0.70, would provide a boost to the Australian economy through stronger export growth. It also shifts price relativities in goods and services markets to favour local producers. 
While indicating that the possibility is “very remote”, RBA Assistant Governor Chris Kent, recently discussed the RBA’s studies on UMPs in an interview with Bloomberg. Kent flagged that unconventional policies would not be used on a pre-emptive basis. But rather only after symptoms of economic stress had materialised that warranted policy action. 
Governor Glenn Stevens has also stressed that the RBA’s current inflation targeting framework is flexible enough for inflation to undershoot the target for a reasonable period of time. These comments cover the current situation where there is above-potential economic growth and reasonable growth in the labour market, but low inflation. It also appears to indicate that the RBA is reluctant to use UMPs. There would need to be greater downside risks to economic activity and, as part of that, upside risks to the national unemployment rate.  
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Possible UMP options 
RBA Assistant Governor Christopher Kent, in a recent interview, stated that a combination of UMPs used concurrently may be more effective than a single one. So we could expect more than one unconventional policy tool to be employed in Australia should the need arise. 
Most Likely Options 
We consider the most likely QE options for the RBA to be as follows. The list is not exhaustive, but they appear realistic. 
1. Explicit forward guidance from the RBA that provides a high degree of certainty that the cash rate will stay low for a long time. Credible forward guidance in publications and speeches lowers interest rates along the interest rate term structure. This in turn supports financial asset prices and would apply some downward pressure to the currency. Markets and investors would benefit from regular updates on the RBA’s reasons for maintaining expansionary monetary policy settings. 
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Large scale domestic bond market asset purchase programs. Asset purchases raise the price of assets being purchased, and lower their yields. Lower yields on these assets in turn encourage investors to purchase other types of assets, pushing up their prices and generating positive wealth effects. Preferred assets for purchase are likely to be Federal and State government debt. 
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However a reduction in the long term yields from corporate and 600 government bond asset purchase may not have a significant impact on household or business borrowing costs in Australia. As interest rates go lower the transmission of monetary policy to bank lending rates may become less effective. 
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Looking at other countries with very low or negative policy rates shows that deposit rates have not declined to the same extent as central bank policy rates. This has limited the extent to which banks can reduce their lending rates without reducing their margins and profitability.
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Excluding banks and financials, the Australian corporate bond market is relatively small. This means lower yields for these securities would have 
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a limited impact on overall business borrowing costs, especially if interest rates are already low. 
Asset purchases are likely to have implications for the value of the Australian dollar. Foreigners hold a significant share of government bonds outstanding. The Australian dollar will be sold if foreigners reduce their holdings of these assets in response to lower yields and redirect their money back offshore. Offering a Bank of England type Term Funding Scheme where the RBA lends significant amounts to the commercial banks at the prevailing cash rate to ease commercial banks’ cost of funding. This enables the banks to pass on the full extent of any interest rate cuts.
Financing government infrastructure spending via purchase of Federal and State Government bonds of varying maturities. It could be done in tandem with the current Federal Government asset recycling program. It involves State Governments receiving a 15% premium from the Federal Government for an asset sale that is then used to finance infrastructure that is intended for future sale.
Fortunately, Infrastructure Australia has a list of projects, across the States, which would produce the most effective medium and longer term economic and social outcomes. We have recently published research on the shortfall in public infrastructure investment in Australia.
Unlikely policy options 
We consider the following options to be less likely in Australia:
Negative interest rates (NIR). Assistant Governor Kent has said that NIR would pose problems for the banking system and put the money market fund industry at risk. Governor Stevens has also said that the likelihood of negative rates in Australia is “low” and that it could damage bank earnings. This in turn could lead to higher lending rates and lower credit supply, which is the opposite effect to what was intended.
NIR are initially applied between the central bank and commercial banks at a wholesale level. But in Germany, some banks are now applying them to retail depositors.
It may also pose potential risks for funding Australia’s current account deficit. We make the observation that so far, no country with a current account deficit has implemented negative rates.
The purchases of foreign assets over and above normal reserves management. Kent has said that purchases of foreign assets would be seen internationally as overt exchange rate targeting. RBA Governor Stevens has previously been criticised for trying to “talk down” the valuation of the Australia dollar. G20 member countries, which includes Australia, agreed not to target their exchange rates for competitive purposes.
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Conclusions 
We have canvassed what we see as the most likely options should QE policies be introduced. However we emphasise that it would take a significant downshift in economic growth and a rise in the unemployment rate for the RBA to consider UMP. We see the most likely options as forward guidance and bond market asset purchases. Ideally, a concerted effort to lift activity via publicly-funded infrastructure programs in transport, ports, airports and education would augment it. The aims are to stimulate activity, drive the economy towards full employment and keep inflation within the target band without financial instability. It’s a learning curve at a new, extraordinarily low level of global interest rates. 
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 Michael Workman is senior economist, <a href="https://www.commbank.com.au/corporate/research?ei=mv_research" target="_blank">Commonwealth Bank</a>.
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