It would, however, be an option if there were a crisis in the Australian economy, or if there were a substantial global economic slowdown or a breakdown in the supply of credit similar to what happened during the GFC, they said. Loading Given how volatile and fragile global economic conditions are as the Trump administration’s trade conflict with China threatens to escalate and the President’s love of tariffs puts the eurozone at risk, and how exposed the Australian economy is to a trade war-induced slump in our region, the prospect of a cash rate nudging zero, however, can’t be dismissed. The CBA team has considered what an Australian version of QE might look like. Their conclusion is that it would probably be a lot smaller than the programs implemented overseas and more focused. That’s probably because, as Debelle said, the Australian government bond market is quite small and therefore QE might be more effective in lowering the cost of borrowing for the federal and state governments and companies.

CBA estimates that a local QE program might be equivalent to only about 4 per cent of GDP, compared with the US version (16 per cent of GDP), the eurozone’s (20 per cent), the UK’s (25 per cent) and Japan’s (80 per cent). Those economies were, of course, responding to a severe financial crisis and deep economic recessions. The most obvious way to lower market interest rates would be for the RBA to buy Australian Commonwealth government bonds, with the CBA economists saying that by concentrating around the two-year to 10-year maturity spectrum it could lower rates right across the yield curve. RBA deputy governor Guy Debelle has acknowledged that quantitative easing - RBA purchases of government bonds and securitised mortgages - is a policy option. Credit:Andrew Meares It would also lower swap rates, allowing companies borrowing at variable rates to swap into fixed rate debt and lock in very low rates at low cost. They also said that, as has occurred in Europe and Japan, the RBA could buy Australian dollar-denominated corporate bonds, but made the point this would present significant political and liquidity challenges.

The RBA could also lower the cost of funds for banks, either by intervening directly in the bank bill swap rate (BBSW) market, or by expanding its investment in repurchase agreements, where it sells securities to the banks and then buys them back, usually overnight. A modest expansion of its repurchase agreements activity would in turn lower the BBSW rate, the benchmark for most interest rates in the economy. A side-effect of any QE program would almost certainly be a depreciation of the Australian dollar. During the GFC the Australian Office of Financial Market provided support for smaller banks and other lenders by buying securitised residential mortgages. Either it, or the RBA (which accepts securitised mortgages as security in its repurchase agreements operations), could reprise that buying to increase the supply of liquidity for lenders and decrease its cost. The federal government could also, the CBA economists say, issue debt for a major infrastructure spending program or tax cuts or even "helicopter money’’ – cash deposited directly in people’s bank accounts – that the RBA would acquire. A side-effect of any QE program would almost certainly be a depreciation of the Australian dollar – the economists estimate it would fall between 2 and 5 per cent against the US dollar – which would also help boost the economy.

As noted earlier, the CBA team doesn’t expect the RBA will have to resort to QE. The RBA’s rate cuts, Australian Prudential Regulation Authority’s relaxation of some of its macro-prudential measures, the federal government’s promised tax cuts, the recent increase in the minimum wage and the elevated iron ore price ought to help provide a floor under the economy. The exchange rate, which has depreciated against the US dollar partly because of the impact of the trade conflict on China’s economy and partly because the US economy has higher interest rates and stronger economic growth than the rest of the developed world, should also help. So, if there were to be a significant risk of recession, the RBA does have the capacity to reduce rates further, even if that capacity is diminishing. The federal government also has, relative to most other developed economies, significant fiscal capacity if more conventional stimulus is required. If all else fails, however, there are the QE options pioneered offshore.

While the overseas experiences of QE might suggest varying degree of success, the RBA has, at least, had the ability to examine them and come to its own conclusions as to what forms of QE might work, or not, in this economy.