RBA Bond Program Could Cost $58 Billion

The Reserve Bank said this cut borrowing costs from state and federal governments by about $7 billion.

But the intense buying, which has coincided with a time when bond prices peaked as interest rates plunged to historic lows, will negatively impact the Reserve Bank’s financial position in the coming years.

Major paper losses on his portfolio will fade over time as those bonds reach maturity.

In a speech on Wednesday, Deputy Governor Michelle Bullock revealed for the first time the magnitude of the accounting losses reported by the central bank. In late June 2022, she said the Reserve Bank held $356 billion in state and federal government bonds.

The surge in bond yields, amid one of the most severe fixed income sell-offs in history, resulted in a mark-to-market loss of about $40 billion on its holdings, while another $5 billion is due. of the decline of the bonds bought above their face value. This was offset somewhat by a $1 billion gain on foreign assets as the currency depreciated.

The net result, taking into account $8.2 billion in positive gains, is that the central bank will report a loss of $36.7 billion for the year, 8.6 times greater than the previous year’s loss.

It also allows to lose money if interest rates rise.

This is because as the spot rate rises, the interest it pays to banks that have money on deposit with the central bank will rise relative to the lower interest it earns on the bonds bought under QE.

The cumulative cost, the Reserve Bank said, could be as high as $58 billion, depending on the interest rate path.

“The final cost will not be known until the last of the bonds purchased matures in 2033, with different scenarios presented in this review,” the review said. “In most scenarios, the bank will not be able to pay dividends to the government for several years.”

Amid past speculation that the RBA could demand a multi-billion-dollar capital injection from the government, Treasurer Jim Chalmers said the advice from the RBA and the Treasury was that a capital injection was not necessary and that the bank would change its balance sheet. would recover in time.

The budget did not assume any dividends from RBA, he said.

The investigation found that the central bank considered seeking compensation from the government for the losses, but decided it “wasn’t necessary”. This would simply move a liability to the government balance sheet and raise questions of independence.

Support jobs

The central bank said QE’s main intention was to “provide additional support to job creation and the Australian economy’s recovery from the COVID-19 pandemic, thereby providing additional insurance against the continued risk of very bad economic results”.

The board of directors would remain open to the use of supposedly unconventional monetary policy, which describes any other mechanism besides the overnight rate target, but only in extreme circumstances.

The central bank stated that QE is likely to be preferred over the yield curve control policy that reached an undignified end in November 2021 when the market lost confidence in the central bank’s ability to defend the target.

“Compared to a return target, a BPP [bond purchase program] would provide more flexibility to respond to changing economic conditions,” the Reserve Bank said. “However, a BPP can incur greater financial costs than a return target, which should be carefully considered in the given circumstances.”

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