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Reserve Bank of Australia reports $37 billion loss

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By John Beveridge - 
Reserve Bank of Australia loss $37 billion bond purchase program 2022

In 2021-2022 the Reserve Bank of Australia recorded an accounting loss of $36.7 billion.


It’s just as well the Reserve Bank of Australia is in the business of pushing for economic stability and full employment, because as an investor it is no good.

All of the people who sold an amazing $300 billion of state and Federal Government bonds to the RBA during the COVID-19 pandemic must be absolutely delighted to have had such a willing buyer of their super-low yield bonds.

With the RBA later forced into a rapid U-turn and raising interest rates in an effort to dampen demand and get inflation back under control, those low-yield bonds became a form of financial kryptonite, going through a large and growing negative capital loss.

More losses to come

Those losses will continue to mount as rates keep climbing but already they have been big enough to push the RBA into its largest ever loss of almost $37 billion.

It is even worse when you look into the details – the actual conventional operations of the RBA still churned out underlying profits of $8.2 billion which would normally be partly available to the Federal Government to bolster its budget position.

Instead, these profits were totally swallowed by the $44.9 billion valuation loss on all of those bonds it had recently bought.

That is a serious amount of money, especially when you consider that the RBA was hoovering up these bonds at a rate of $5 billion a week at the worst and most locked-down times of the pandemic.

Print your own money to avoid going broke

Of course, the RBA is not like other institutions – when you can effectively indirectly print your own cash there is no real danger of going broke, although it is worth remembering that these losses are still very real.

If the RBA holds these bonds to maturity, it will get all of its money back, although the real return will be deeply negative when you factor in the lost opportunity cost of the money and the almost negligible interest rates payable on these bonds.

Even if the RBA trades down its bond portfolio, it will be crystallising theoretical valuation losses and turning them into actual losses.

In one sense these losses don’t mean too much – except if you are Treasurer Jim Chalmers and would find the extra $8 billion or so of RBA profits every year very handy.

Losses much worse than HIH collapse

In another sense they do mean a lot, because they have left the RBA in a position where the funds it holds to offset valuation losses have been completely used up and the bank has a $21 billion shortfall and is in negative equity.

As a way to apply some scale to this, the biggest corporate collapse in Australia’s history was the demise of insurance company HIH in March 2001 and that collapse represented $5.3 billion.

Using the RBA’s own very useful inflation calculator, that collapse would now be worth almost $8.5 billion – still a lot smaller than the RBA’s actual annual loss and the valuation loss on its bond portfolio.

Of course, the RBA is not there to make money but to act as a stabilising force in the Australian economy and it very much did that during the dark days of peak COVID, reducing interest rates on government bonds and increasing the size of the Australian economy by about $25 billion over three years.

Governments issuing the bonds both state and federal saved around $7 billion in interest payments and could divert more money to stimulus measures as a result.

RBA will take years to rebuild its balance sheet

Still, this stimulus came at a cost, with the RBA now forecasting that it will be retaining its profits for quite some time to come to rebuild its balance sheet and get itself into a better shape to fight the next crisis – which given the current state of the world economy could be any day now.

Just as the Federal Government’s trillion dollars of accumulated debt is a brake on its ability to expand spending, so the RBA’s bloated and heavily underperforming balance sheet will restrict its flexibility to react as well.

The RBA can’t go broke but it can run out of firepower and eventually require extra capital from the Federal Government and the more it raises interest rates, the more that firepower will reduce.