Reserve Bank Prints New Money: What It Means?

Reserve Bank Prints New Money: What It Means?

On March 19, The Reserve Bank of Australia cut down rates to 0.25 per cent right after the federal government announced the initial stimulus package, which included a bond-buying scheme.

Hence, the RBA kept the interest rates at a historic low, saying that it was necessary. It predicted that the country would experience a massive economic contraction in the next quarter. The country’s central financial institution targeted an investment yield of 0.25 per cent for the government bonds with a three-year payment schedule.

The rates will not increase until the federal government achieves progress in its inflation and employment objectives according to the board of the Reserve Bank.

In a brief interview with Governor Philip Lowe, he expressed that Australia’s near-term economic stance remains uncertain. He added that it depends on how successful efforts are with containing the virus and how long social restrictions would remain implemented.

By the next quarter beginning June, Lowe said he expects a massive contraction in the economy and an increase in the unemployment rate for the succeeding years.

The novel coronavirus crisis has slowed down economic activity recently claiming 46 lives from the almost 6,000 recorded cases in Australia.

Because of social restrictions, numerous businesses, particularly in the hospitality, transport, education, and trade industry, as well as community services, have closed down temporarily. On the other hand, businesses that chose to remain operations have been facing a decline in profits and increasing demands in operational restrictions.

The Australian PSI has recently seen its lowest index points since March 2009 with a steep drop to 38.7 points. Furthermore, Banking Groups in Australia and New Zealand showed how job advertisements have declined with March as the most significant drop in more than a decade.

In surveys conducted by Roy Morgan and ANZ, consumer sentiment rebounded last week from having dropped for two months after Scott Morrison announced a JobKeeper stimulus. This new government measure will subsidise over six million workers with a $1,500 a fortnight.

Nevertheless, economists still think a 10 per cent spike in the unemployment rate would be imminent in the next succeeding months. In February this year, the joblessness rate remained at 5.1 per cent until the series of company close-downs happened last month. With the continuous threat posed by the coronavirus pandemic, it would be possible that many are out of employment already.

Catherine Birch, the ANZ Senior Economist, said they were expecting 1.1 million people to be out of work, which could bring the unemployment rate to peak at 13 per cent. However, she projected this way before Morrison announced the JobKeeper wage subsidy scheme.

With this emergency stimulus to keep people their jobs, the JobKeeper payment could be an economic variant of “flattening the curve”, explained Birch.

Did the Reserve Bank Create New Money?

The RBA has been procuring government bonds either through contracts with four of Australia’s major financial institutions or with an investment manager recently. As a result, the central bank expands its balance sheet in the process. How could the RBA print the money out of nowhere?

According to the Unconventional Monetary Policy of the RBA, the process involves the immediate procurement of assets known as quantitative easing (QE) or asset purchases. With quantitative easing, the central bank will purchase assets from a private entity with disbursements coming from the central bank reserves.

The process referred to as money creation and the Reserve Bank has confirmed doing this recently.

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