On the 26th of November, in a much awaited speech broadcast live on the website of the Reserve Bank, Governor Phil Lowe set out very clearly the circumstances in which the bank would depend on quantitative easing and how it would enforce it.

Governor Lowe said the lower effective limit of rate cuts was 0.25%, and explicitly said that the RBA would not allow the interest rate to go negative.

Instead, the bank would push down other longer-term rates by purchasing government bonds. This is known as “quantitative easing” and was used by the US Federal Reserve between 2009 and 2014.

Government bonds are marketed as a way of borrowing by governments in return for money. The investor receives fixed interest payments and a promise that, depending on the length of the bond, their money will be repaid in full after three, five, ten or even 20 years.

When released, bonds can be exchanged on a market and the price at which they exchange hands can be represented as an implied rate of interest. This becomes the risk-free rate against which all other interest rates are benchmarked.

All other things being equal, this should also push down the exchange rate by reducing the return on Australian dollar denominated financial investments.