Via Chris Joye:
The challenge for monetary policy is that conventional tools are tapped out. The RBA’s main policy lever, the overnight cash rate, has hit its effective lower bound at 0.1 per cent. Two of its unconventional levers – the circa $200 billion Term Funding Facility (TFF) and the yield curve control policy that keeps the three-year government bond yield at 0.1 per cent – have little runway left. The TFF is providing the banking system with more funding than it needs right now. And the RBA has effectively ruled out negative rates.
The one policy the RBA has remaining that has enormous untapped capacity is its five- to 10-year Commonwealth and state government bond purchase program, known as “quantitative easing” (QE). This seeks to reduce the yields, or interest rates, on Commonwealth and state government bonds to levels that are lower than they would otherwise be. In doing so, the RBA undermines the appeal of these assets to foreigners, prompting them to sell Aussie dollars, putting downward pressure on our exchange rate.
