In March 2020, the RBA used, for the first time, Unconvential Instruments of Monetary Policy.

The Unconventional Instruments of Monetary Policy are; §

• Quantitative Easing (QE)
• A Term funding facilitity to deposit-taking instituitions (TFF)
• Forward Guidance; and
• Changes to interest rates on Exchange Settlement accounts by Approved Deposit-Taking Instituitions (ADIs)

Quantitative Easing §

Refers to RBA purcahse of assets

• Usually purchasing Government Bonds on the Secondary Market
  • Thus increasing the price of bonds.
  • Thereby, reducing their Yield
    • (Bonds reduce in yield as price rises)

Between; March and September 2020;

• The RBA purchaased $63b worth of bonds from the Secondary Market
  • In an attempt to achieve 0.25% on 3-year Australian Government Securities (Bonds)
  • This was equal to the cash rate at the time.
• The purchase of bonds pumped cash into the economy.

This is not the same as Financing a Deficit, or "Printing money"

Bonds purchased on the Secondary Market are not directly funding the government budget deficit, the government must still make interest payments to bondholders. and repay them after 3-10 years. (source)

The Mechanics of Quantitative Easing - Bond prices & Yields

Consider an investor held 1000 every year. The bond-holder thus receives regular income payments, and the initial investment is returned in 2026.

The objective of the bond purchase program (QE) was to support lower interest rates across the board. To do so, the RBA entered the secondary bond market, which increased demand and drove up the prices that bondholders would receive if they sold. Perhaps our bondholder could get 1000 coupon until maturity. But now the coupon payment is a lower proportion of the purchase price (105,000 = 0.0095 or 0.95%). The effective rate of return (or yield) in the bond market has now fallen by 5 ‘basis points’.

Because the RBA bought large numbers of bonds, they were able to lower effective yields to the cash rate, and ensure there was ample ‘cheap money’ to help the economy recover from the COVID period. Over nearly two years, the RBA bought over $280 Bn of government bonds of various maturity dates. The ‘forward guidance’ aspect of policy was to ensure the market that the bond buying would continue as long as necessary - initially the RBA specified 2024, but in fact the bond purchase program ceased in February 2022.

Term Funding Faciliity §

This provided three-year funding for approved deposit-taking instituitions, like banks, at a fixed interest rate the same as the cash rate.

• That being 0.25% then, 0.1% later on. This would provide Finanical Instituitions with greater confidence about their access to funding, and to lower their funding costs, so that could be passed on as lower household & business borrowing costs. The TFF closed to new drawdowns on 30 June 2021

Other Potential Uncoventional Policy Measures §

• A Below zero cash rate
  • This would’ve been ineffective however, negative interest rates encourage withdrawel from d eposit-taking instiutiotons.
    • However this is the opposite of what is required if households & firms need thosei nstituitions to create credit