Reserve Bank governor Philip Lowe (Image: AAP/Joel Carrett)

The Reserve Bank will likely announce it will commence quantitative easing (QE) on Thursday, joining other central banks in helping the economy adjust to the impact of the coronavirus crisis.

In a statement issued around noon on Monday, RBA governor Philip Lowe gave further details on the bank’s bond buying and repos (repurchase deals) announced earlier by the Council of Financial Regulators. They’re intended to support liquidity levels in financial markets and to keep the banks and the wider economy well supported with enough money to carry on normal operations.

“The Reserve Bank stands ready to purchase Australian government bonds in the secondary market to support the smooth functioning of that market, which is a key pricing benchmark for the Australian financial system,” Lowe said.

The government bond market — traditionally a haven for investors panicked about equity market volatility — has come under pressure recently as institutional bond holders have sold off large tranches of bonds despite big falls on sharemarkets. This, in turn, has pushed up bond yields — effectively the return holders can expect off bonds — which are, as Lowe noted, “a key pricing benchmark” which influence interest rates for business lending.

The RBA is keen to ensure that the bond market can get back to functioning more like normal rather than the distorted operations of recent days.

But Lowe finished the statement with a rare heads up to the markets and business: “The bank will announce further policy measures to support the Australian economy on Thursday.”

That’s almost certain to involve Quantitative Easing. QE usually involves a central bank entering financial markets and purchasing financial assets — often government bonds, but sometimes other assets like corporate bonds and home mortgages (in Japan, it includes Exchange Traded Funds). That increases money supply in the economy and encourages lending and investment, whether in the stockmarket, as we have seen since 2009, or in house prices or economic growth generally.

We know the RBA board had an extensive discussion at its February meeting — the first of the year, and the first post-bushfires and emergence of coronavirus — on QE options for Australia:

Members reviewed the policy and academic discussions taking place around the world regarding the operation of macroeconomic policy and monetary policy frameworks in an environment where interest rates are low because of structural factors.

These discussions focused on a range of issues, including: the appropriate level and specification of inflation targets; the cases for and against more aggressive monetary policy easing when policy interest rates are near the effective lower bound; the role of forward guidance and strategies for lowering long-term interest rates and their potential side-effects; and the role of fiscal policy.

Members also reviewed the international discussions regarding possible changes in the monetary transmission mechanism at low interest rates.

The RBA also had a big seminar last year on QE and has had months of discussions at senior levels, especially as the three interest rate cuts last year did little to kick start the economy.

In November, Lowe laid down some ground rules around what the RBA would do if it had to embrace QE (back when it was a very big, indeed unlikely, if ): confine it to purchasing government, not corporate, bonds, and in the secondary market (i.e. not directly from government).

A look at other countries shows where central bank thinking is as the crisis worsens. The US Federal Reserve made an emergency decision on Monday to slash its key federal funds rate by 1.25% to effectively 0% and start a new US$700 billion campaign of quantitative easing. The Reserve Bank of New Zealand also cut its key policy rate to 0.25, and indicated that it stood ready to start a campaign of bond buying if needed.

When, as seems likely, the RBA cuts the cash rate to 0.25% on Thursday, it too will have nowhere else to go except to negative interest rates. After seeing how that has gone in Japan and Europe, there is great reluctance in the RBA to go down that route.

The Fed, the Bank of Japan, the Bank of England, the European Central Bank (ECB) and various central banks in Switzerland and Scandinavia have all, at various stages in the last decade, been in the same position. They have introduced large programs of QE, sometimes involving corporate bonds and other assets as well as government bonds, to try and keep growth going.

Australian triple-A rated government securities carry relatively high interest rates (the coupons they were issued by the government, not current market rates, which in nearly all cases are much lower). That makes them more expensive to buy, which in turn makes their yields lower, which as a benchmark will in turn push interest rates lower. But no one is concerned about interest rates at the moment — liquidity is the problem.

The RBA will be keen to find ways of making sure its QE cash gets past the banks and bondholders and into the hands of customers large and small. That’s why the talks later this week between ASIC, APRA, the RBA and the banks will be important in making that happen.

But the RBA may also want to find ways to inject more cash directly into business and the wider economy, beyond keeping money markets and the banks liquid. Some advocates suggest “helicopter money” — where a central bank simply sends a cheque to households or business, the equivalent of Kevin Rudd’s cash splash, but sourced from the central bank’s capacity to simply print money.

Normally that’s associated with inflation, but no one is worried about inflation right now either. In fact, if the slowdown in the economy starts intensifying, disinflation will be the problem. The slump in oil prices is already threatening to push inflation lower, perhaps to 1% or less in coming quarters.

All will be made clear on Thursday. At the speed the crisis is moving — both economically and epidemiologically — the RBA will need to produce something extraordinary to inject some much needed stability and calm.