As part of its coronavirus response, the RBA is creating money out of thin air. Here’s how

Reserve Bank confirms ‘money printing’

In recent weeks the Reserve Bank has been buying government bonds. It may do this via an agreement with one of the big four banks, or maybe with a fund manager — anyone that has been holding the bonds in bulk.

It’s been doing this by “expanding its balance sheet”.

It sounds technical but it’s actually really simple.
Most households have a budget. And if you wanted to, you could create your own balance sheet. Your car would be listed as an asset and your credit card debt would be a liability.

The thing is, your cash is fixed. You have income coming in every fortnight or every month and, unless you get a pay rise, it doesn’t change.

What if, however, you could create money? You’d just sit at home, go to your balance sheet and change your $10,000 in the bank to $100,000. Easy. You could buy more stuff then using your debit card — no need to print your own money.

This is what the Reserve Bank has now done.

In its explainer on Unconventional Monetary Policy the Reserve Bank says:

“Asset purchases — also known as quantitative easing (QE) — involves the outright purchase of assets by the central bank from the private sector with the central bank paying for these assets by creating ‘central bank reserves’.

“This has been popularly referred to as ‘printing money’.”

So how does this affect me?

As the Reserve Bank buys up government bonds their price goes up and the yield, or interest rate, on those bonds goes down.

This means the Reserve Bank can influence the interest rates on three-year government bonds. This in turn lowers the interest rates on other debt securities.

The Reserve Bank has said it is targeting three-year bonds in the hope of lowering the entire regime. But it has said it will buy across the spectrum of bonds too.

The 10-year rate is the common benchmark or risk-free rate. That’s still elevated, but about half what it was midway through March.

The Reserve Bank has already bought tens of billions of dollars of bonds, but by the time it’s finished, both variable and fixed rate mortgages, as well as business loans of all shapes and sizes, should all be even lower than they are today, and, most importantly, will remain low for years.

It will have also give the Federal Government a once-in-a-generation opportunity to splurge on the economy at obscenely low interest rates, to help pay of things like the JobKeeper payments.

This is because it’s government debt that the Reserve Bank is ultimately making cheaper by buying its bonds.