RBA facing a $58bn Covid loss

The Treasurer insists the Reserve Bank won’t need a fresh cash injection amid revelations its $281bn pandemic bond-buying could cost as much as $58bn over the decade.

The Reserve Bank of Australia has defended its $281bn Covid ‘insurance’ program despite being unsure of its effects on the economy. Picture: Bloomberg

Jim Chalmers says the Reserve Bank will not need a fresh injection of taxpayer money, after the central bank reported its $281bn pandemic bond-buying program would drive a “substantial” financial loss in 2021-22 and cost the central bank as much as $58bn over the coming decade.

In a report into the extraordinary monetary policy program, the RBA said it was unsure what specific economic effect this extraordinary bond-buying program had during the pandemic, but that it worked in combination with a suite of other unconventional pol­icies and was justified “insurance” against the potentially catastrophic impact of the crisis.

The Treasurer said the bond-buying program was “a really important part of Australia’s res­ponse to the pandemic, and inevitably that has consequences for Reserve Bank’s balance sheet”.

The RBA paid $300bn for the $281bn worth of state and federal debt securities it bought between November 2020 and February 2022 (paying well above the market price had the effect of pushing 10-year bond yields down).

As a result, there would be a $20bn “known” loss between now and when the last bond bought during Covid 2033 matured in 2033. There would be an additional “unknown” cost of funding the program of between $15bn and $38bn – based on a number of scenarios of how high the cash rate rises in the coming years, the RBA report states.

Speaking in Sydney, RBA deputy governor Michele Bullock warned the bank would report “a substantial accounting loss in its 2021-22 annual accounts, resulting in the bank being in a position of negative equity”.

“This will not, however, affect the bank’s ability to operate,” Ms Bullock said. “We can create money – that is what we did when we bought the bonds, so we can do that (again),” she said.

“As the bonds mature and the bank’s balance sheet declines, the bank will once again return to positive earnings. These earnings will result in the bank returning to positive equity over time.”

While the ultimate cost will not be known for more than a decade, the RBA review said that “under most scenarios, the bank will not be in a position to pay dividends to the government for a number of years,” the report said.

This cost would be offset by the lower-than-otherwise interest bill on the government’s debt, although, once again, this was difficult to quantify.

“It’s no surprise to us that there won’t be a dividend from the Reserve Bank this year, given the pressures that they’ve been under and the decisions that they’ve taken,” Dr Chalmers said.

He said the impact on the budget was “largely understood”.

“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,” he added.

Capital Economics senior economist Marcel Thieliant, however, said “given that it (the RBA) did receive a capital injection in 2013 and that it may well record further substantial losses, we suspect that it may yet happen”.

Ms Bullock said the bank was satisfied that the program achieved its intended goals of lowering bond yields – by about 0.3 percentage points – and contributing to a lower exchange rate than would have otherwise been the case.

But she added: “Just as we concluded in the review of the yield target, if more weight had been given to possible upside scenarios on the economy, the assessment of the relative costs and benefits of the BPP (bond-purchase program) might have been different and led to alternative decisions.”

The Albanese government has commissioned a sweeping review of the central bank’s performance, objectives, operations and governance, with a report due early 2023.

RBA governor Philip Lowe has conceded that the bank overstimulated the economy, but that it was justified as an “insurance policy” against a worst-case scenario.