The Reserve Bank’s role in supporting the Australian economy during the Covid pandemic has resulted in a 2021-22 accounting loss of nearly $37 billion, leaving it with negative equity, the deputy governor of the bank, Michele Bullock, revealed.
Speaking in Sydney on Wednesday, Bullock said the accounting methods used by the central bank needed to be adjusted for the diminished value of billions of dollars of government debt that the RBA had purchased to support economic activity during the lockdowns.
For 2021-2022, that left a valuation loss of $44.9 billion, which, after deducting $8.2 billion in underlying profit, resulted in a net loss of $36.7 billion, Bullock said. The bank’s reserve fund of accumulated profits could only absorb some of those losses, leaving the RBA with negative net worth of $12.4 billion, she said.
While private companies “wouldn’t be a problem” in such a dire situation, Bullock said the government has provided a guarantee and that the bank itself can also print money to meet its obligations, and “so it is not insolvent”.
“The negative equity position will therefore not affect the Reserve Bank’s ability to do its job,” she said.
Still, it remained important for the RBA to return “over time” to a positive equity position, and there would likely be an impact on the federal budget in the form of a lack of dividends as the bank rebuilds its equity.
“While it has not requested a capital injection, the board has informed the government that it expects future profits to be retained by the bank until the bank’s capital is restored,” Bullock said.
“The treasurer has endorsed this general approach, noting that under the Reserve Bank Act, the issue of distributions to the government is considered every year,” she said.
The fiscal ramifications of government efforts to keep the economy afloat during the Covid disruptions tend to draw more attention than the monetary ones, including the underlying cash deficit of $134.2 billion in the year 2020-21.
However, the role of the RBA was also important, and it will take time to assess the impact of its efforts and remaining legacies on its balance sheet and, ultimately, that of the federal government.
Earlier on Wednesday, the RBA released the results of an internal review of the so-called quantitative easing measures it took during the depths of the pandemic-induced economic crisis to detail their effectiveness and what lessons it has learned.
The bank ended up buying $281 billion in federal, state and territory debt between November 2020 and February 2022. Previously, the RBA had little such debt compared to some other rich countries, but the gap narrowed during the pandemic.
The purpose of buying bonds was to “lower the structure of interest rates in Australia”, effectively lowering the cost of borrowing.
In addition, it provided “additional insurance against the continued risk of very poor economic results,” the bank said.
The RBA review estimated that buying all those bonds cut government bond yields (interest rates) “by about 30 basis points” to record lows.
In the process, the RBA’s balance sheet was transformed as the bonds wiped out the liabilities.
The review rates the program as a success, but the RBA’s board of directors stressed that “it is appropriate to consider the use of unconventional monetary policy tools only in extreme circumstances, when the usual monetary policy tool – the target of the spot rate – has been used to de completely possible”.
In other words, the RBA won’t engage in a similar bond-buying effort unless other options to keep the economy afloat—namely cutting interest rates—have been exhausted.