Quantitative easing is a monetary policy in which a central bank of monetary sovereigns is able to increase economic activity and
avert financial crisis (Brock 2021). This procedure describes increasing the money supply by providing liquidity into the financial
system by supplying additional bank reserves into the economy (Australia 2022). Quantitative easing is conducted when central
banks purchase large-scale long-term government bonds that are held by financial institutions. Quantitative easing was first
introduced in 2008 during the global financial crisis by Japan as an unconventional monetary policy and has prompted mixed
opinions due to the true effectiveness of it (Fasano-Filho, Wang, and Berkmen 2012). Consequently, the COVID-19 pandemic has
affected several developed economies such as Australia, and therefore required them to implement different quantitative easing
strategies.
Quantitative easing can be commonly misunderstood as it involves a large injection of liquidity into the economy created through
a computer, and the money from quantitative easing can sometimes be referred to as free or “helicopter” money (Stella et al.
2021). However, quantitative easing does not have a direct impact on the money supply, but instead expands the monetary base
via asset swaps. Government-issued securities that are held by financial institutions that have a prearranged profit level and
development time, which results in the repurchasing of government bonds resulting in no monetary gain other than the profit
after development (Australia 2021). However, if the currency was infinite the country would suffer from hyperinflation as a result
of an inflated rise in money supply without the associated economic growth required. Quantitative easing affects the financial
markets which affects the economy as a whole.
Commercial banks are able to readily provide loans to individuals and firms at reduced interests rates due to a sufficient balance
reserve and an inflationary pressure on the cash rate. Consequently, economic growth and the money supply are increased.
Furthermore, insurers, investment banks, and fund managers are able to accept a larger amount of financial risks by investing in
larger value investments that can potentially have greater profit yields such as real estate and more premium stock pools (Beltratti
and Corvino 2008). In principle, utilising quantitative easing to avoid an economic recession is simple, despite this, there are several
restrictions and unpredictable behavioural aspects that could limit the effectiveness of quantitative easing (Thornton 2022).
As a result of the unexpected consequences of the COVID-19 pandemic, the Australian government reacted quickly to utilise
monetary policy measures in order to address the impending economic downfall. The RBA released a policy package on March
18th, 2020, in order to help consumers, companies, income, and firms, which resulted in a cash rate cut by 25 basis points deriving
out of the former 0.50 % (Australia 2020). There was a fixed floor rate of 9.1% in the corridor system despite the price ceiling
staying constant which was 25-basis points greater than the goal. Open market activities occurred on the overnight market as a
consequence of the historically low cash rate reduction (Australia 2020). Initially, the cash rate was designed to retain its relatively
low value until “ There was improvement for entire employment to be accomplished and inflation is expected to remain in the
range of 2-3%” based off the Reserve Bank Boards intentions (Reserve Bank of Australia 2022).
The originating quantitative easing program in Australia had a 0.25% goal over a government bond of 3 years (Finlay, Titkov, and
Xiang 2021). This focus was specifically for short-run securities as it was desired to establish a memorable standard to interest
rates in different economies and stock exchanges. The RBA intended on raising the ES balances to $14 billion from the initial $2.5
billion but on November 3rd they declared a 0.1% cash rate cut, in addition to the persistence of the quantitative easing incentive
(Debelle 2021). However, in this case a $100 billion dollar acquisition of corporate, semi-government, and government bonds was
initialised take course over the next 6 months (Debelle 2021). The RBA declared that an 8:2 ratio was planned to achieve an for
government to semi-government securities over the course of this period (Australia and Australia 2021).
There have been several effective continuous purchases by the RBA of short-term bonds over a year ever since quantitative easing
was declared. The amount of government-related purchases of bonds from March 2020 to March 2021 can be shown in figure 2
illustrated below. Consequently, it can be observed that the cash rate has repeatedly fell below the original objective ever since
the announcement was made. As shown in figure 1, this transpired between the cash rate target cuts of 0.25% and 0.1% within
March and November (Debelle 2021). Despite the intention of the target cash rate representing a real target it has essentially
become more of a “ceiling” rate.
Figure 1
Figure 2
The pattern observed of the real interest price dropping beneath the predetermined goal indicated the distinctive money supply’s
sharp increase. The cash rate was expected to decline and was in line with the goal of lowering the cost of financing the Australian
economy. On a typical day of operations, lending extra currency due to the surplus reserves on bank balance sheets. However,
there were still times where it was necessary for banks to obtain extra currency in order to keep their balances in check. When
comparing interest rates to pre-pandemic conditions, there can be a significant fall in trade and demand activity (Aziz et al. 2022).
Interest rates remained low when compared to the conditions before the COVID pandemic, which was a significant factor in the
fall of demand and trade activity. When analysing figure 3 below it can be observed that changing the ES balance has an inverse
relationship to the development of cash exchanges (Reserve Bank of Australia 2019). Consequently, this results in the peak cash
exchange frequency occurring toward the end of March which is credited by the lowest position on the ES balance during the
period of quantitative easing.
Figure 3
The Australian Stock Exchange (ASX), similarly with the cash rate exchange has undergone a substantial price decrement since
2020 (Xiradis 2022). Comparatively, the ASX has slightly differed since the relationship of interest rates and the 3-year government
bond returns as it can be observed that the market has gradually recovered (Australia and Australia 2021a). Figure 6 depicts the
movement of the All-Ordinaries stock index (The top 500 ASX listed companies) as well as demonstrating a detrimental drop,
reaching its lowest in 2020 March (Market Index 2014). This implies that the implementation of quantitative easing programs has
influenced the fall of the cash rate to 0.25% and the fall of the ASX (AGLSTERMS 2022). Additionally, it can also be seen that there
was a cash rate decrease during November. The effect on the increasing index, however was negligible by the news, because
government intervention had minor impact on the stock exchange, as seenon the November report, suggesting other variables
besides quantiative easing have affected the ASX.
Figure 4
Furthermore, the effect of quantitative easing in conjunction with the decline of the cash rate, which consequently decremented
the interest rates through to every Australian financial market. The RBA typically frequently traded government and nongovernment bonds at interest rates below the current periods target cash rate (Reserve Bank of Australia 2022a). The introduction
of quantitative easing purchases has stabilised the government bond yield fluctuations of 10-year government bonds after the
COVID pandemic.
Figure 5
Quantitative easing makes bond returns disappointing which allows the federal government to auction larger scales of their
treasury to afford the expansionary taxes policy. As the federal government purchases treasuries, it increases demands and keeps
treasury returns insignificant. An inverse relationship can be observed between prices and yields. Low rates on corporate bonds
allow for the affordability of business expansions. The quantitative easing increases the money supply and maintains the low value
of the countries currency (Jackson and Curry 2021). The stocks are attracting foreign investors, because it gives more money for
their investment. Which results in exports becoming less expensive. Australian experts are concerned about quantitative easing
creating inflation and hyperinflation which means selling properties could see a reduction in the money supply and decrease any
inflation.
However, in reality the bank of England purchases exclusively government bonds from pension funds and insurance companies
(Bank of England 2022). Only the Federal Reserve has unrivalled authority in the United States. As a result, some individuals believe
the Federal Reserve is creating money (Board of the Federal Reserve System 2017). Quantitative easing is functioning well in both
the United States and Australia. There are many similarities and variances.
In the United Kingdom, quantitative easing was introduced in 2009 as the effects of the Great Recession remained and inflict
damage on the economy, with GDP falling by 2.6% (NEF, n.d.). The Bank of England began quantitative easing as the last option
after traditional monetary policies failed to provide a sufficient economic solution. By the third quarter of 2009, the United
Kingdom successfully recovered from the recession, which was regarded as an economic achievement (Office for National
Statistics 2018). In the following years, the economy unanticipatedly grew faster than other democracies such as the United States,
Japan and Germany. The figure 6 below illustrates the GDP growth from before the recession through till 2020 (Ferreira 2019).
After the success of the first quantitative easing the Bank of England has implemented three additional quantitative easing
programs during the 2012 Eurozone debt crisis, the 2016 Brexit financial crisis, and the 2020 COVID-19 pandemic (Bank Of England
2020). Following each quantitative easing program, the number of purchases by the Bank of England has consistently grown. Since
the Great Recession, the economy has grown from £200 billion to £741.9 billion in 2020 (Office for National Statistics 2021).
Figure 6
The United Kingdom’s monetary policy, similar to Australia’s began its quantitative easing and open market initiatives in 2020 by
decreasing the cash rate of government bonds to 0.25% on March 11 th and then to 0.1% on the 19th of March (Bretzke, n.d.).
Therefore, the Australian monetary policies being similar to the United Kingdom’s can be implied from this piece of information.
The fast change in interest rates in addition to the £895 billion QE purchase plan, indicate that the United Kingdom’s government
was adamant about receiving assistance for the economy earlier on (Bank Of England 2020).
The United Kingdom’s experience with quantitative easing during the previous 12 years has prompted worries about asset bubbles
forming around stock prices specifically on the London Stock Exchange (LSE) and the real estate market (Elliott 2021). During the
economic crisis, the lowest index of the FTSE an index of the top 100 listed companies on the London stock exchange was 3513,
however during a historically bullish market, it quickly increased above 7000 (London Stock Exchange 2020). During 2021, the ASX
experienced a similar effect, which suggests that the impact of quantitative easing on the United Kingdom’s economy has led to
increased socioeconomic inequality which can be shown in figure 7 below (Bunn et al. 2018). Despite the increased money
exchange that lending money provides the entire economy, it should be considered that only economic firms with trust with their
economic stability are capable of capitalising on these opportunities, which expands individual wealth. This could potentially
develop into a larger issue in Australia when considering decrements in the wage growth.
Figure 7
The adoption of quantitative easing inside Australia’s monetary policy in 2020 achieved its primary goal of promoting economic
activity throughout the COVID-19 pandemic. Due to the ample availability of reserves and the drop in interest rates, consumer
and corporate loans are now more affordable. The successful rebound of the GDP and the increasing trend of the All-Ordinaries
index demonstrate that many Australians remain hopeful of the countries economic recovery. Despite this, several figures
regarding the money supply and wage growth rate imply that quantitative easing has yet to completely alleviate the private sector
of their COVID-19 pandemic economic burdens. By learning the outcomes of the United Kingdoms 12 years of quantitative easing,
it is clearly demonstrated that the continued influx of reserves without the financial stability to support would continuously divide
the social classes and increase the wealth inequality. As a result, the success of the quantitative easing theory in stimulating the
economy is heavily dependent on the private sector’s confidence and financial stability.
Word count: 1919
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