The Reserve Bank’s role in shoring up Australia’s economy during the Covid pandemic has seen it post an accounting loss for the 2021-22 year of almost $37bn, leaving it with negative equity, the bank’s deputy governor, Michele Bullock, has revealed.
At a speech in Sydney on Wednesday, Bullock said accounting methods used by the central bank had to adjust for the reduced value of billions of dollars of government debt the RBA had bought to support economic activity during the lockdowns.
For the 2021-22 year, that left valuation losses of $44.9bn which, after deducting for $8.2bn in underlying earnings, left a net loss of $36.7bn, Bullock said. The bank’s Reserve Fund of accumulated profits could only absorb part of those losses, leaving the RBA with negative equity of $12.4bn, she said.
While private companies in such a predicament “would not be a concern”, Bullock said the government provided a guarantee and the bank itself could also print money to meet its obligations, and “so it is not insolvent”.
“The negative equity position will, therefore, not affect the ability of the Reserve Bank to do its job,” she said.
Even so, it remained important that the RBA returned to a positive equity position “over time”, and there would likely be an impact on the federal budget in the form of a lack of dividends as the bank rebuilt its equity.
“While it has not sought a capital injection, the board has indicated to the government that it expects that future profits will 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 each year,” she said.
In a response to media questions about whether Treasurer Jim Chalmers was concerned about RBA losses reaching as much as $58bn, he said the bank’s bond buying had been a “really important part of Australia’s response to the pandemic”.
“The advice is that we don’t require an additional capital injection, the bank will repair its capital position over time, and that’s appropriate,” Chalmers said, adding it was also no surprise that there would not be an RBA dividend this year.
The fiscal impacts of government efforts to keep the economy going during the Covid disruptions have tended to get more attention than the monetary one, including the $134.2bn underlying cash deficit in the 2020-21 year.
However, the RBA’s role was also significant, and the impacts of its efforts and residual legacies for its balance sheet and, ultimately the federal government’s, will take some time to determine.
Earlier on Wednesday, the RBA published 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 its effectiveness and what lessons it learnt.
The bank ended up buying up $281bn of federal, state and territory debt between November 2020 and February 2022. Previously the RBA held little such debt compared with some other rich nations, but the gap narrowed during the pandemic.
The RBA has announced a review of its bond-buying program during Nov 2020-Feb 2022 that saw it snap up $281bn in a bid to keep interest rates down. Here's how the buying compared with other economies. (Source: RBA) pic.twitter.com/3mLivyHOnq
— Peter Hannam (@p_hannam) September 20, 2022
The aim of the bond buying was to “lower the structure of interest rates in Australia”, effectively reducing the cost of borrowing.
In doing so, it provided “extra insurance against the ongoing risk of very bad economic outcomes”, the bank said.
The RBA review estimated that buying up all those bonds reduced the yields (the interest rate) on government bonds “by around 30 basis points” to record lows.
In the process, the RBA’s balance sheet was transformed as the bonds blew out the liabilities.
The RBA's balance sheet has been transformed by all that bond buying. If marked to market, the bank would have a big negative value given how bonds have traded since the Covid pandemic has eased and inflation has taken off. pic.twitter.com/eGXERQKEUO
— Peter Hannam (@p_hannam) September 20, 2022
The review assesses the program to have been a success, but the RBA board stressed that “it is appropriate to consider use of unconventional monetary policy tools only in extreme circumstances, when the usual monetary policy tool – the cash rate target – has been employed to the full extent 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.
