RBA implements quantitative easing in Australia for the first time

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on March 19, 2020
RBA implements quantitative easing in Australia for the first time

Photo by Trent Szmolnik on Unsplash

Australia's central bank today announced it would use the full extent of its monetary policy powers to stem the economic fallout from COVID-19.

The Reserve Bank (RBA) announced on Thursday it would commence quantitative easing tomorrow, as well as cutting Australia's cash rate to a new record low of 0.25%.

It's the first time ever the RBA has cut rates twice in a month or implemented quantitative easing, after the Board scheduled an emergency board meeting on Monday, with an impending recession potentially looming. 

The coronavirus has battered the Australian economy, with the government attempting to stop the spread of the virus by banning overseas travel and gatherings of over 100 people, decimating tourism and retail sectors.

In a statement, RBA Governor Philip Lowe announced a target for the yield on 3-year Australian Government bonds of around 0.25%.

"This will be achieved through purchases of Government bonds in the secondary market," Dr Lowe said.

"Purchases of Government bonds and semi-government securities across the yield curve will be conducted to help achieve this target as well as to address market dislocations.

Dr Lowe said the RBA's main goal was to support the Australian economy through these unprecedented times. 

"The primary response to the virus is to manage the health of the population, but other arms of policy, including monetary and fiscal policy, play an important role in reducing the economic and financial disruption resulting from the virus," he said.

"At some point, the virus will be contained and the Australian economy will recover.

"In the interim, a priority for the Reserve Bank is to support jobs, incomes and businesses, so that when the health crisis recedes, the country is well placed to recover strongly." 

The RBA also announced it would provide lenders with funding of at least $90 billion if they increase funding to small and medium-sized business, in an effort to keep this sector afloat throughout the pandemic. 

See if your lender is passing in this emergency cut here.

Want to earn a fixed interest rate on your cash? The table below features term deposits with some of the highest interest rates on the market for a six-month term.

Lender

Annually$product[$field["value"]]$product[$field["value"]]$product[$field["value"]]100031$product[$field["value"]]$product[$field["value"]]More details

Personal Term Deposit - 6 months (Annually)

    At Maturity$product[$field["value"]]$product[$field["value"]]$product[$field["value"]]5000$product[$field["value"]]$product[$field["value"]]More details

    Term Deposit - 6 months

      At Maturity, Annually$product[$field["value"]]$product[$field["value"]]$product[$field["value"]]1000031$product[$field["value"]]$product[$field["value"]]More details

      Term Deposit - 6 months ($10k-$250k)

        Annually, At Maturity$product[$field["value"]]$product[$field["value"]]$product[$field["value"]]100031$product[$field["value"]]$product[$field["value"]]More details

        Edvest Term Deposit I20 ($1000-$499999) - 6 months

          Annually, At Maturity$product[$field["value"]]$product[$field["value"]]$product[$field["value"]]100031$product[$field["value"]]$product[$field["value"]]More details

          Term Deposit I10 ($1000-$499999) - 6 months

            Annually, At Maturity$product[$field["value"]]$product[$field["value"]]$product[$field["value"]]250000$product[$field["value"]]$product[$field["value"]]More details

            Term Deposit ($250k+) - 6 Months

              Annually, At Maturity$product[$field["value"]]$product[$field["value"]]$product[$field["value"]]100031$product[$field["value"]]$product[$field["value"]]More details

              Term Deposit (> $1000) - 6 months

                Annually, At Maturity$product[$field["value"]]$product[$field["value"]]$product[$field["value"]]1000031$product[$field["value"]]$product[$field["value"]]More details
                FLEXIBLE INTEREST AND REPAYMENT TERMS
                • Interest can be paid to other institution
                • Automatic maturity rollover
                • Early Withdrawal Available
                FLEXIBLE INTEREST AND REPAYMENT TERMS

                Term Deposit (<$1m) - 6 months

                • Interest can be paid to other institution
                • Automatic maturity rollover
                • Early Withdrawal Available

                Rates based on a $50,000 deposit for 6 months. Rates correct as of June 25, 2022. View disclaimer.

                What is quantitative easing? 

                Quantitative easing, also known as QE, is the process by which the RBA uses its cash reserves (aka printing money) to buy government bonds. 

                In some cases, the RBA can also buy private bonds, but has elected to not do so in the announced program. 

                The best way to think about QE is the RBA spends huge quantities of cash it has created to ease monetary policy.

                But we'll get into the nitty gritty to really understand the concept.

                Firstly, a government bond is a relatively low-risk investment product which essentially involves investors lending money to the government for a set period of time, at a predetermined rate of return, which is referred to as the yield or a bond's interest rate.

                They're considered quite low risk, as it's considered highly unlikely the government will go broke and fail to repay this debt.

                So with the RBA set to buy billions of dollars worth of government bonds, the government is given a lot more cash to spend and this extra money is flushed through the economy. 

                The RBA's purchase also raises the price of bonds and lowers bond yields, which in turn, lowers funding costs for lenders, allowing them to cut the interest rates on home loans and business loans. 

                Coupled with low-interest rates, banks are better off lending money than holding onto it.

                So we arrive back at the beginning: the RBA spends huge quantities of cash it has created, to ease monetary policy.

                Essentially, QE should have the same effect on rates as a rate cut would, but the RBA was all out of rope on rate cuts and had to turn to QE. 

                Thinking about refinancing to a low-rate, variable owner-occupier home loan? The table below displays some of the lowest-rate variable home loans currently on the market for owner occupiers:

                Lender

                Variable
                More details
                UNLIMITED REDRAWSSPECIAL OFFER
                • Fast turnaround times, can meet 30-day settlement
                • For purchase and refinance, min 20% deposit
                • No ongoing or monthly fees, add offset for 0.10%
                UNLIMITED REDRAWSSPECIAL OFFER

                Smart Booster Home Loan Discounted Variable - 2yr (LVR < 80%)

                • Fast turnaround times, can meet 30-day settlement
                • For purchase and refinance, min 20% deposit
                • No ongoing or monthly fees, add offset for 0.10%
                Variable
                More details
                100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES
                • No upfront or ongoing fees
                • 100% full offset account
                • Extra repayments + redraw services
                100% FULL OFFSET ACCOUNTNO APPLICATION FEE OR ONGOING FEES

                Low Rate Home Loan - Prime (Principal and Interest) (Owner Occupied) (LVR < 60%)

                • No upfront or ongoing fees
                • 100% full offset account
                • Extra repayments + redraw services
                Variable
                More details
                ZERO APPLICATION FEESFEE FREE OFFSET
                • We lower your rate based off how much you’ve paid down your loan
                • Automatic rate match
                • No upfront or ongoing fees
                • The shorter your loan, the less interest you pay in the long run.
                ZERO APPLICATION FEESFEE FREE OFFSET

                Owner Occupier Accelerates - Celebrate (LVR < 60%) (Principal and Interest)

                • We lower your rate based off how much you’ve paid down your loan
                • Automatic rate match
                • No upfront or ongoing fees
                • The shorter your loan, the less interest you pay in the long run.
                Variable
                More details
                AN EASY DIGITAL APPLICATION
                • No ongoing fees - None!
                • Unlimited additional repayments
                • Easy online application, find out if you're approved quick!
                • Redraw- Access your additional payments if you need them
                • Use the app to get loan insights to help you pay off your home loan faster
                AN EASY DIGITAL APPLICATION

                Neat Variable Home Loan (Principal and Interest) (LVR < 60%)

                • No ongoing fees - None!
                • Unlimited additional repayments
                • Easy online application, find out if you're approved quick!
                • Redraw- Access your additional payments if you need them
                • Use the app to get loan insights to help you pay off your home loan faster
                Variable
                More details
                NO APPLICATION FEES
                • No ongoing fees - None!
                • Unlimited additional repayments
                • Easy online application, find out if you're approved quick!
                • Redraw- Access your additional payments if you need them
                • Use the app to get loan insights to help you pay off your home loan faster
                NO APPLICATION FEES

                Yard Home Loan (Principal and Interest) (LVR < 80%)

                • No ongoing fees - None!
                • Unlimited additional repayments
                • Easy online application, find out if you're approved quick!
                • Redraw- Access your additional payments if you need them
                • Use the app to get loan insights to help you pay off your home loan faster
                Variable
                More details
                NO UPFRONT OR ONGOING FEES
                • No ongoing fees - None!
                • Unlimited additional repayments
                • Easy online application, find out if you're approved quick!
                • Redraw- Access your additional payments if you need them
                • Use the app to get loan insights to help you pay off your home loan faster
                NO UPFRONT OR ONGOING FEES

                Owner Occupier Accelerates - Evaporate (LVR 60%-70%) (Principal and Interest)

                • No ongoing fees - None!
                • Unlimited additional repayments
                • Easy online application, find out if you're approved quick!
                • Redraw- Access your additional payments if you need them
                • Use the app to get loan insights to help you pay off your home loan faster
                Variable
                More details
                NO UPFRONT OR ONGOING FEES
                • No ongoing fees - None!
                • Unlimited additional repayments
                • Easy online application, find out if you're approved quick!
                • Redraw- Access your additional payments if you need them
                • Use the app to get loan insights to help you pay off your home loan faster
                NO UPFRONT OR ONGOING FEES

                Low Rate Home Loan - Prime (Principal and Interest) (Owner Occupied) (LVR < 80%)

                • No ongoing fees - None!
                • Unlimited additional repayments
                • Easy online application, find out if you're approved quick!
                • Redraw- Access your additional payments if you need them
                • Use the app to get loan insights to help you pay off your home loan faster
                Variable
                More details
                UNLIMITED EXTRA REPAYMENTS
                UNLIMITED EXTRA REPAYMENTS

                Basic Home Loan (Principal and Interest) (LVR < 60%)

                  Variable
                  More details
                  EASY DIGITAL APPLICATION
                  EASY DIGITAL APPLICATION

                  Neat Variable Home Loan (Principal and Interest) (LVR 70%-80%)

                    Variable
                    More details
                    $0 APPLICATION FEE
                    $0 APPLICATION FEE

                    Budget Home Loan (Principal and Interest) (LVR < 80%)

                      Variable
                      More details
                      100% FULL OFFSET ACCOUNT
                      100% FULL OFFSET ACCOUNT

                      Offset Package Home Loan (Principal and Interest) (LVR < 60%)

                        Variable
                        More details
                        LIMITED TIME OFFER
                        • Fast turnaround times, can meet 30-day settlement
                        • No ongoing or monthly fees, add offset for 0.10%
                        • Extra repayments + redraw services
                        LIMITED TIME OFFER

                        Smart Booster Home Loan Discounted Variable - 1yr

                        • Fast turnaround times, can meet 30-day settlement
                        • No ongoing or monthly fees, add offset for 0.10%
                        • Extra repayments + redraw services

                        Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. All products will list the LVR with the product and rate which are clearly published on the Product Provider’s web site. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of June 25, 2022. View disclaimer.


                        Disclaimers

                        The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered. Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au, and Performance Drive are part of the Savings Media group. In the interests of full disclosure, the Savings Media Group are associated with the Firstmac Group. To read about how Savings Media Group manages potential conflicts of interest, along with how we get paid, please visit the web site links at the bottom of this page.

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                        author-avatar
                        Alex joined Savings.com.au as a finance journalist in 2019. He enjoys covering in-depth economical releases and breaking down how they might affect the everyday punter. He is passionate about providing Australians with the information and tools needed to make them financially stable for their futures.

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