Reserve Bank of Australia may create money to boost economy if rates drop to 0.25%

Governor of the Reserve Bank of Australia, Philip Lowe, stated that the RBI may create money in order to purchase government bonds if all of its options to boost the economy up fail when its official interest rate is slashed to 0.25 per cent. In a public address, Lowe added that a thins such as quantitative easing could provide support in further cuts in interest rates and fiscal stimulus fall short of boosting the Australian economy.

Attempt to boost economy

According to reports, cash rates have been slashed three times to 0.75 per cent and interest rates said to be cut to 0.25 per cent. Economists including Goldman Sachs chief economist in Australia and New Zealand, Andrew Boak, stated that quantitative reasoning would be needed in such a scenario. 

Economists have said that the RBA has fallen short of meeting the inflation target of 2-3 per cent for 20 successive quarters, adding that the RBA may be forced to buy government bonds worth $200 billion to fill the financial system with money.

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If the RBA creates money then the borrowing cost for the Australian government to clear up credit somewhere else in the financial system that will be able to help households and businesses that financial support to remain afloat or to invest in long-term projects that help stimulate the economy.

Quantitative easing: An effective option?

According to reports, the current opinion was that quantitative easing can be considered at a cash rate of 0.25 per cent but not before that because at that particular point the cash rate would be zero. Also, quantitative easing could be used as a support system to reach full employment and inflation if by chance the objectives were not met.

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Lowe added that quantitative easing would bring down the yields for government bonds by up to 0.2 per cent and would signal Reserve Bank of Australia's commitment to keep the cash rate low for an extended period of time.

According to reports, Liberal MP Tim Wilson asked the RBA to justify the positive influence of its monetary policy, stating that he was concerned that lowered rates lead to bigger repayments of the loan principal without causing a boost in cash flow.

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(With inputs from agencies)