But the debate over whether or when our Reserve should start raising interest rates overshadowed an important development last week: its decision to end QE – quantitative easing; the Reserve buying second-hand government bonds with money it created with a few keystrokes – ceasing to buy $4 billion worth of bonds every week.
For too long, borrowers have paid negative interest rates, with savers receiving little or nothing as a reward for letting others use their money.
Lowe announced that in total, the various elements of the Reserve’s QE program involved the purchase of more than $350 billion in bonds. (He didn’t say that meant the Reserves had, in effect, funded more than all of the government’s pandemic stimulus spending with created money. Everything is an accounting entry between the government and the central bank that it owns.)
Among the various benefits of the quantitative easing program claimed by Lowe was that it resulted in Australia having “a lower exchange rate than it otherwise would have had”. He also noted that the US Federal Reserve and other central banks were ending their EQ programs.
And there you have the real reason why, having shunned us from QE after the global financial crisis, Lowe felt he had no choice but to join the pandemic-related second round.
The least doubtful “benefit” of QE is that it exerts downward pressure on the country’s exchange rate, to the detriment of the price competitiveness of its trading partners.
So when the mighty Fed engages in QE, most other central banks feel they need to defend their own exchange rates by joining in. Any country that does not join the game becomes the rabbit whose exports suffer.
Lowe reminded us that the end of the bond buying program was not a tightening of monetary policy, but rather a cessation of further easing. True. The crunch – quantitative tightening, or QT – will come if, at the maturity of the bonds it bought, the Reserve decides not to replace them with new bonds. He hasn’t decided what he will do yet.
Financial markets, the media and ordinary citizens are far more interested in what happens to interest rates than in the mysteries of unconventional monetary policy. But this end to QE is a reminder that it would make little sense to continue to be bored with QE with one hand while raising interest rates with the other.
It is important to ensure that we do not risk interrupting our return to a supported stimulus by raising interest rates too soon – that is, before our business people are forced to abandon their perverse idea that it is best to keep wage rates low forever – or by raising interest rates too high.
We want to come out of the pandemic with more than just a rebound in lockdowns. We need continued growth, which requires a return to real wage growth.
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But remember this: the current “guidance” monetary policy is very stimulative. It can’t last forever. In the absence of any sign of excessive wage growth, it is clear that we need not swing to the opposite extreme of interest rates so high that they are restrictive. We don’t try to put the clamps on demand.
No, the next movement, when it comes, will be from a stimulating position simply to a neutral position – a position that is neither stimulating nor contractionary. That time will come when we will be convinced that the growth of the economy will be sustained. It is then that the return of interest rates to more normal levels will be a Well sign, a sign of success.
And remember this: thanks to the world’s dubious experience with unconventional monetary policy for over a decade – with almost every central bank in the rich world printing money as if it were going out of fashion – the monetary side of the global economy (including ours) is far out of whack.
For too long borrowers have paid interest rates which, taking inflation into account, are negative, with savers receiving little or nothing to compensate them for the loss of purchasing power of their money, let alone reward for letting others use their money.
It’s perverse. This is the opposite of how the economy is supposed to work. It is neither fair nor sensible. This is the way to encourage investments that are not really productive. We won’t go back to anything like normal until eventually interest rates are much higher.
Don’t forget that. Your grandmother didn’t.
Ross Gittins is the economics editor of the Herald.
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