Today the Reserve Bank of Australia (RBA) decided to keep interest rates on hold at the historic low of 0.1 per cent – but the bank's biggest move was hiding below the headline figures.
As part of his monetary policy decision, RBA Governor Dr Philip Lowe announced that the central bank was ending its bond purchasing scheme due to the unexpected speed of the nation's economic recovery.
But what actually is bond buying? And how does the RBA's monthly decisions affect the ordinary Australian?
From cash rate to quantitative easing, here's how to decode the jargon.
READ MORE: Interest rates remain on hold at record low 0.1 per cent
Interest rates: the basics
Australia's interest rate – or cash rate target – is decided by the Reserve Bank of Australia (RBA) on the first Tuesday of each month between February and December.
A press release detailing the change or hold in interest rates is sent out at 2:30pm on this day, which is why you may receive a flurry of news alerts around this time.
In extremely general terms, this interest rate determines the cost of unsecured overnight loans between banks.
READ MORE: How interest rate hikes will slash your borrowing power
If the interest rate is between banks, why should the ordinary Aussie care about it?
Very simply, if it costs more money for a bank to borrow and lend money it is inevitable that some of that cost will be passed on to the customer.
With this in mind, many view the RBA's interest rate decision to be a barometer for how cheap or expensive bank loans will be to repay for Australians.
Home loans are naturally the biggest loan the ordinary Australian will ever take out in their lifetime.
It makes sense that any change in the official cash rate is likely to have some flow-on effect to those with variable rate mortgages.
Banks don't have to pass on interest rates changes to loan holders, but can and do. They are a money-making business after all.
READ MORES: Grim forecast for Aussie homeowners
So what then is the "monetary policy decision" and why should people care?
The monetary policy decision is released by the Governor of the Reserve Bank (currently Dr Philip Lowe) at 2:30pm on a rate decision day.
It is a lengthy statement that essentially sums up why the board of the RBA chose to hold, hike or cut interest rates.
In economic terms, it's bit like an important address from the Prime Minister: it forecasts what the RBA expects will happen in the economy, it occasionally downplays commentary in the media and business communities and it is written carefully and conservatively.
The content of the decision – while often dry to many of us outside of economics – can change stock markets, re-define people's investment strategies and shape government policy.
So you could say that it has a pretty wide-ranging influence.
READ MORE: Westpac forecasts first interest rate rise within months
Today the RBA said it was ending its bond purchasing program. What does that actually mean?
Dr Lowe said the RBA will cease further purchases under the bond purchase program, with final purchases to take place on February 10.
The RBA Governor said this decision was taken following a review of what other nation's central banks have done and the general strength of the economy.
Essentially when a nation's central bank buys government bonds it is injecting cash into the financial system.
The RBA announced on November 3, 2020 that it would purchase bonds issued by the Australian Government and by the states and territories in the secondary market under a $100 billion bond purchase program.
In this way, it was effectively helping to lower the whole structure of interest rates in Australia, without reducing the cash rate below 0.10 per cent.
In other words, buying bonds was a way of supporting the economy when COVID-19 restrictions meant many couldn't work.
It's another tool at the RBA's disposal to keep the economy humming along during difficult periods.
READ MORE: Aussie house prices to drop 10 per cent in 2023
I see. So what then is quantitative easing?
Like bonds purchasing, defining quantitative easing is hard to do in simple terms without introducing more jargon.
Effectively quantitative easing (or QE) is another tool for the RBA to support the economy and inject more cash into the system.
Buying government bonds is one component of that.
Some people have described QE as "printing money" but it's not physically ramping up production at the printing presses – it's buying financial assets so that money is readily available.
If banks have more money to finance more loans, it's likely people will use that finance to stimulate the economy by buying houses and cars or expanding their business – which then helps the manufacturers and the recipients of all that money spent.
READ MORE: Westpac hikes fixed rate home loans for third time in a month
So after all of that, when is the RBA going to hike up interest rates?
That I can't tell you.
In his monetary statement today, Dr Lowe said the RBA was "prepared to be patient" and will wait until actual inflation is sustainably within the two to three per cent range.
Currently it is 2.6 per cent.
Some of the brightest economists in the country have forecast that the RBA will lift interest rates from as early as August 2022 – but these are more highly-educated guesses than insider secrets.
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