A pivot towards quantitative tightening is a tacit admission that the RBA is less likely to buy bonds to stimulate in future recessions.
The Reserve Bank of Australia and Treasury are considering the RBA executing a U-turn on its pandemic “money printing” stimulus and selling federal bonds back to the government.
Any move to sell the bonds would be aimed at reducing interest-rate risk on the RBA’s $610 billion balance sheet and stemming potential further losses.But any bond sales would be gradual and not aim to use QT as an active monetary policy tool to push bond yields higher or tighten financial conditions.
“If the board was to change its view from passive unwinding, its current position, it will go on to speak to government,” Kennedy said. The federal government budget’s shift to surplus and lower forecast deficits in future years may provide an opportune time for the AOFM to soak up the RBA’s bonds in an orderly fashion.
Hence, the RBA bought government bonds on the secondary market and not directly from the government, but the overall effect was lower government borrowing costs. Anna Hughes, Australian Office of Financial Management CEO, says any changes of course would be clearly and transparently communicated.“While there has been considerable speculation around this, I would point out that the RBA’s position on its bond holdings is the same today as it was prior to the release of the May board minutes. That being said, that they have no current plans to sell and that their portfolio will simply run down passively with maturities.
In November 2020, the RBA followed foreign central banks by launching a much bigger $281 billion QE stimulus by buying federal and state bonds with maturities of between three and 10 years. The yield curve control target came to an undignified end in November 2021 when it became obvious financial markets no longer respected it and bet heavily against the RBA’s 2024 interest rate rise guidance. The sloppy exitMoreover, the RBA review suggested board members were not made properly aware of the balance sheet risks the bank was exposed to from the intersecting QE and TFF policies that have since led to multibillion-dollar losses.
While the TFF pushed down fixed mortgages to about 2 per cent for home borrowers, Australian variable-rate home loans price off three-month and six-month bank bill swap rate and not long-term bond yields. Banks also parked their excess TFF funding in the ES accounts and now have about $400 billion deposited at the RBA.
The RBA has already marked-to-market the paper losses on the value of the bonds, but selling them before maturity would crystallise the losses. It reported negative equity of $12.4 billion last financial year after reporting an accounting loss of $36.7 billion.called for the government to recapitalise the RBA through an equity injection of more than $10 billion
Banks have begun slowly repaying the TFF and are due to return $84 billion of the $188 billion to the RBA by September 30. The remaining balance is due by June 2024.Regional banks with relatively small ES balances need to raise money from wholesale markets or depositors to repay the TFF money.The big four banks have huge ES balances at the RBA, accounting for most of the $400 billion deposited at the central bank. They could draw on this money to repay the RBA.
Prime examples are when liquidity evaporated from local money markets during the March 2020 initial COVID-19 lockdown shock and when the Bank of England stepped in last year amid an investor revolt over £45 billion of unfunded UK tax cuts.
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