Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 534

The RBA’s QE losses

Accounting losses from a pandemic inspired bond buying spree has wiped out the Reserve Bank of Australia’s (RBA) equity and more, pushing its balance sheet into negative equity territory.

Its 2022/23 annual report shows a loss of $6 billon for the financial year, which following the $36.7 billion loss in the previous year, now has the bank’s liabilities $17.7 billion in excess of its assets (see chart). But being a government entity that can create money to pay its bills, it remains secure.

How it happened

How did the RBA get into this predicament? To understand why the RBA is losing money, we need to follow the flow of money building up to the losses.

When the pandemic exploded in early 2020, the federal government commenced fiscal support packages such as JobKeeper, raising government debt significantly. At the same time, the RBA introduced unprecedented monetary stimulus including ultra-low interest rates and increased commercial bank reserves via quantitative easing (QE).

When the federal government raises debt, it is a loan to the government from the private sector via commercial banks. The banks transfer deposits to Treasury, and a matching liability of government debt arises. That debt is recorded as an asset for the banks, offset by the loaned funds it transferred to Treasury. Treasury pays interest on the government debt to the banks. The resulting balance sheet movements are depicted:

When QE occurs, it is mostly seen as money creation. But it could also be construed as a loan, this time from the private sector to the RBA. Being the “borrower", the RBA gains an asset and a liability, in the form of government debt and commercial bank deposits respectively. The deposits having been created electronically by the RBA, which only central banks can do. The RBA pays interest on those deposits to the banks. Again, the balance sheet movements:

When QE and government debt raising occurs simultaneously, the commercial banks' balance sheets net out, leaving:

If Treasury then transfers its deposits to the private sector to fund say a JobKeeper scheme, then the RBA will have effectively financed that fiscal spending via electronically created deposits. That financing will remain in place until such time that the RBA pays back the government debt it “borrowed” from the banks, and its self-created liabilities are extinguished.

The impact of interest rate rises

The illustrative RBA balance sheet built above reveals a double whammy when interest rates rise. On the assets side, the value of the debt it holds falls with rising interest rates. And on the liabilities side, higher interest rates translate into higher servicing costs on the commercial bank deposits created in the QE process.

With the RBA purchasing some $330 billion worth of government bonds during the QE program at a coupon of around just 0.25%, a rapid rise to 4.1% in the official cash rate has wreaked havoc on the mark-to-market value of its portfolio. And what began as a cost of just 0.1% on the increased bank deposits, has blown out substantially with 4.1% now being paid.

With less than ten per cent of its bonds holdings having matured thus far, the RBA at this stage does not plan to actively sell bonds to wind down its portfolio faster, which would realise capital losses. All the while recognising the risk of further losses if interest rates continue to rise.

This situation is not confined to Australia, with central banks in other advanced economies suffering extensive losses with their QE programs.

The lessons

The question might therefore be asked, did central banks go into the QE caper with eyes wide shut, given the poor financial outcomes of high inflation, rapidly increasing interest rates, and impaired central bank balance sheets?

Many would say that losses should have been expected when buying low-yielding bonds, and when interest rates can really go only one way, up. And that it was not such a good idea after all. While others would say that the stimulus kept businesses afloat, unemployment low, and that it was all for the greater economic good.

In the fullness of time, governments will need to balance whether significant monetary stimulus is appropriate in times of global turmoil, being mindful that there really is no such thing as a free lunch.

 

Tony Dillon is a freelance writer and former actuary. This article is general information and does not consider the circumstances of any investor.

 

RELATED ARTICLES

Former RBA Governor on why interest rates won't come down soon

Yikes! Three critical factors acting on inflation and rates

US rate rises would challenge multi-asset diversified portfolios

banner

Most viewed in recent weeks

Are term deposits attractive right now?

If you’re like me, you may have put money into term deposits over the past year and it’s time to decide whether to roll them over or look elsewhere. Here are the pros and cons of cash versus other assets right now.

Uncomfortable truths: The real cost of living in retirement

How useful are the retirement savings and spending targets put out by various groups such as ASFA? Not very, and it's reducing the ability of ordinary retirees to fully understand their retirement income options.

Is Australia ready for its population growth over the next decade?

Australia will have 3.7 million more people in a decade's time, though the growth won't be evenly distributed. Over 85s will see the fastest growth, while the number of younger people will barely rise. 

How retiree spending plummets as we age

There's been little debate on how spending changes as people progress through retirement. Yet, it's a critical issue as it can have a significant impact on the level of savings required at the point of retirement.

20 US stocks to buy and hold forever

Recently, I compiled a list of ASX stocks that you could buy and hold forever. Here’s a follow-up list of US stocks that you could own indefinitely, including well-known names like Microsoft, as well as lesser-known gems.

The public servants demanding $3m super tax exemption

The $3 million super tax will capture retired, and soon to retire, public servants and politicians who are members of defined benefit superannuation schemes. Lobbying efforts for exemptions to the tax are intensifying.

Latest Updates

Property

Financial pathways to buying a home require planning

In the six months of my battle with brain cancer, one part of financial markets has fascinated me, and it’s probably not what you think. What's led the pages of my reading is real estate, especially residential.

Meg on SMSFs: $3 million super tax coming whether we’re ready or not

A Senate Committee reported back last week with a majority recommendation to pass the $3 million super tax unaltered. It seems that the tax is coming, and this is what those affected should be doing now to prepare for it.

Economy

Household spending falls as higher costs bite

Shoppers are cutting back spending at supermarkets, gyms, and bakeries to cope with soaring insurance and education costs as household spending continues to slump. Renters especially are feeling the pinch.

Shares

Who gets the gold stars this bank reporting season?

The recent bank reporting season saw all the major banks report solid results, large share buybacks, and very low bad debts. Here's a look at the main themes from the results, and the winners and losers.

Shares

Small caps v large caps: Don’t be penny wise but pound foolish

What is the catalyst for smalls caps to start outperforming their larger counterparts? Cheap relative valuation is bullish though it isn't a catalyst, so what else could drive a long-awaited turnaround?

Financial planning

Estate planning made simple, Part II

'Putting your affairs in order' is a term that is commonly used when people are approaching the end of their life. It is not as easy as it sounds, though it should not overwhelming, or consume all of your spare time.

Financial planning

Where Baby Boomer wealth will end up

By 2028, all Baby Boomers will be eligible for retirement and the Baby Boomer bubble will have all but deflated. Where will this generation's money end up, and what are the implications for the wealth management industry?

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.