If you’ve been paying any attention to financial news over the last few months, you’re bound to have heard the term ‘quantitative easing’ in relation to the RBA. But what is it, and more importantly, what does quantitative easing mean for you?
To combat the economic fallout of the coronavirus, the Reserve Bank implemented a quantitative easing policy. To keep it simple, QE is a bond-buying program with the intent to keep monetary supply high without taking interest rates into the negatives. The RBA has been buying huge amounts of Government bonds to artificially keep yields low. The combination of low interest rates and low bond yields means that it is very cheap to borrow money. This is what the RBA wants. They want people to be able to cheaply borrow money: to keep businesses afloat, or start new ones, and kickstart an economic recovery.
But there are trade-offs to quantitative easing, and some of them will affect you.
The biggest way that the average person would be negatively affected by QE is that bonds now have extremely low yields, and therefore have significantly less use as an investment vehicle. 0.1% per year is not a useful level of return.
Standard investment diversification practice would normally allocate a portion of your capital to investments in bonds. The closer you are to retirement, the higher this apportionment becomes. But since bonds have such low yields, it’s ineffective to have a lot of capital in bonds. If you’re relying on bonds for passive income in your portfolio, you’ll probably want to find an alternative, at least for the next few years.
But you’re benefiting from QE, too.
The fact that the Australian economy has recovered from COVID so quickly is in part due to quantitative easing. If you, your business, or your employer was able take out a loan to keep things afloat during the worst of COVID, QE would have played a part in making that possible.
The lending bonanza that is currently driving real estate prices up is due to the banks’ liquidity. This liquidity is because banks are able to get cheap money, thanks to QE.
QE helped keep people employed during COVID. So the fact that people were coming into your business and spending money which is used to pay your salary, is also partly thanks to QE.
Quantitative easing is an incredibly complicated topic and this video has barely scratched the surface. But now you have an understanding of the role QE has played in Australia’s COVID recovery, and how QE is affecting your day-to-day life. ∎
