However, the RBA’s preferred unconventional tool would technically not be “quantitative” easing.
Yield curve control
Unlike the quantitative targets of the global financial crisis used by the US Federal Reserve to specify the dollar amount of fixed income assets it would buy each month, the RBA would likely announce a numerical government bond yield target and aim to achieve it over time.
The Bank of Japan calls this “rate curve control”.
For a four-year Commonwealth government bond, for example, a hypothetical yield target could be in the range of 0.25 or 0.30%.
Or whatever the performance target.
The considerable power of central banks to change market expectations means that by articulating a yield curve target, for example over four or five years, the bond market may be able to do much of the fundraising. the RBA.
Bond traders would buy government bonds – which would drive up prices and lower the public borrowing rate without risk.
So, as long as the RBA had credibility in the market, a switch to a bond yield target might not lead the RBA to buy Commonwealth government debt or buy only limited amounts.
The advantage for the RBA would be less direct intervention in the private markets and an easier exit route.
More than a decade after the 2008 crisis, other central banks around the world have struggled to escape the expansion of their $ 15 trillion balance sheet.
The Bank of Japan is increasing its purchases of assets, including equities.
The European Central Bank paused before resuming its purchases.
The Fed is closest to its exit by gradually allowing maturing US Treasuries and mortgage-backed securities to expire and withdraw from its $ 4.5 trillion balance sheet.
The slowdown was to take almost a decade, in an optimistic scenario.
But last year, the Fed was forced to plunge back into the market after disruptive volatility and buy short-term securities to bolster nervous investor confidence.
Back in Australia, a lower government benchmark interest rate would lower commercial bank interest rates for businesses, homeowners and consumers.
It would also put downward pressure on the Australian dollar, a necessary evil if other central banks engage in competitive currency devaluations by cutting interest rates.
The US Federal Reserve, the Bank of Canada and other central banks have moved in recent days, with more central bank stimulus packages in the works to help build low confidence in the coronavirus.
Lowe exposed some of the RBA’s unconventional ideas in a speech last November.
“If we were to go in this direction, it would be with the intention of lowering risk-free interest rates along the yield curve,” he said at the dinner of Australian economists.
“As with international experience, this would work in two ways.
“The first is the direct impact on prices of buying government bonds, which lowers their yields.
“And the second is due to market expectations or a signaling effect, the bond purchases enhancing the credibility of the Reserve Bank’s commitment to keep the cash rate low for an extended period.”
Banks under pressure
If the RBA goes this route, there will be negative side effects for commercial banks.
Banks borrow short term and lend long term. They are more profitable with a steep yield curve, when short rates are much lower than long rates.
However, if the RBA manipulates the longer end of the yield curve, it will flatten and hurt the net interest margins of banks, which are already under severe pressure from political pressure to fully pass the rate cut. the RBA Tuesday.
This is why Lowe has ruled out the use of negative interest rates.
“Constantly low or negative interest rates and a flattening of the yield curve can hurt banks’ profitability, leading to lower lending capacity,” he said.
Ultimately, bank profits, measured by return on equity (ROE), will be further reduced, but returns will remain above their cost of capital by about 10%.
The cost of extremely cheap credit will allow shadow capital banks, including buy-now and pay-later operators like Afterpay and fintech upstarts, to eat lunch from traditional banks.
Unconventional monetary policy would have far-reaching consequences.