Supply of money in record lift

The Reserve Bank’s historic bond-buying program has led to the sharpest monthly increase in the money supply on record.

The Reserve Bank’s historic bond-buying program has led to the sharpest monthly increase in the money supply on record.

RBA governor Philip Lowe in March pledged to squash borrowing rates in a COVID-19-­afflicted economy, and steered Australia down the well-trodden path of other major central banks in the US, the UK, Europe and Japan by committing to buying government securities in the open market — a measure known as quantitative easing.

The money supply has jumped by just shy of $70bn in March and then again in April, or by over 3 per cent in each month — the largest monthly increases in the history of the data stretching back to 1976.

“Broad money” in the system is now a record $2.31 trillion. That figure is likely to climb in coming months, albeit at a slacker pace as the RBA scales back its intervention in the market.

In the early 1960s the famed economist Milton Friedman said that “inflation is always and everywhere a monetary phenomenon”. But what was once considered an axiom of economics has come unstuck as the massive money-printing by central banks since the global ­financial crisis has been accompanied by stubbornly low inflation combined with occasional threats of deflation.

CBA head of Australian economics Gareth Aird said that the RBA’s money-printing exercise was similarly unlikely to lead to an outbreak of soaring consumer prices in the coming years.

“QE doesn’t necessarily mean you get an outbreak of inflation, as in this environment the money is going into assets rather than spending,” he said.

Mr Aird said there had been a sharp deceleration in the “velocity of money”, or how quickly an added dollar in the system is translated to actual spending.

UTS professor Warren Hogan, a former chief economist at ANZ, said that the primary concern of rampant money printing was that it would inflate asset prices to unsustainable ­levels.