Pandemic throws Reserve Bank into ‘significant’ loss

The RBA has incurred around $36 billion in losses, due to the Bond Purchase Program (BPP), which was implemented by the bank to provide insurance against “very bad economic outcomes” as a result of the pandemic, the RBA said.

Speaking about the program on 21 September, deputy governor Michele Bullock said the bank will report a substantial accounting loss in its 2021/22 annual accounts, resulting in a “position of negative equity”.

However, despite losses incurred, Ms Bullock reiterated the bank can operate with negative equity and it did not impact its ability to do its job.

“We are not impacted. We can create money,” Ms Bullock said.

“Since it has the ability to create money, the Bank can continue to meet its obligations as they become due and so it is not insolvent.”

The RBA said it will record an accounting loss of $36.7 billion, with the Reserve Bank Reserve Fund (RBRF) absorbing $15.4 billion, leaving around $21 billion losses.

“This will be recorded as accumulated losses on the Bank’s balance sheet, [which] means that the Bank has negative equity,” she said.

The BPP was introduced in November 2020 as part of the central bank’s second package of monetary policy measures in response to the pandemic, complementing existing policies.

It involved the purchase of a total of $281 billion of Australian, state and territory government bonds between November 2020 and February 2022, designed to “lower the structure of interest rates in Australia” and provide extra insurance against the ongoing economic risks.

Prior to 2020, the bank’s balance sheet was between $150 billion and $200 billion and it “held very few domestic bonds outright”, which “changed dramatically during the pandemic”, Ms Bullock said.

“The BPP combined with other policy responses to the pandemic, resulted in the Bank holding around $356 billion in AGS and semis at the end of June 2022,” Ms Bullock said.

Following an internal review the board said the program had “achieved its aims”, however it would only be appropriate to consider the use of a BPP in the future in extreme circumstances, noting the “significant loss” incurred as interest rates had risen.

Given the rising cash rate, the interest paid on escalating liabilities (government deposits and banknotes over $450 billion) has outstripped earnings.

“We are now in the position where, on average, the interest being earnt on our assets is less than the interest being paid on our liabilities. In other words, underlying earnings are negative,” Ms Bullock said.

The bank has not sought a capital injection, however, the board has indicated to the government that it expects that future profits will be retained by the bank until its capital is restored.

[Related: October cash rate hike open for debate]