Australia’s Central Bank Suffers Billions in Bond Purchase Program Losses
The Reserve Bank of Australia has revealed that it lost money on its bond-purchasing program.
Michele Bullock, Deputy Governor of the Reserve Bank of Australia (RBA), spoke at a Bloomberg-hosted event in Sydney yesterday. Bullock claimed that Australia’s central bank lost a significant amount of money during the pandemic. But there was no need to worry because the RBA was not insolvent because it could always print money and business would go on as usual.
The bonds were purchased as part of a $300 billion emergency stimulus program that runs from November 2020 to February 2022. has been marked-to-market, resulting in an A $36.7 billion net loss in 2021/22.The RBA’s net negative equity position has shrunk due to losses on bonds held.
A loss of this magnitude would bankrupt a normal commercial entity. However, the RBA’s liabilities are insured by the government, so this is not the case.
“Furthermore, because it can create money, the bank can continue to meet its obligations as they come due, and thus it is not insolvent” Bullock added.
“As a result, the Reserve Bank’s ability to do its job will be unaffected by the negative equity position.” Bullock
Bullock believes that other central banks are in a similar situation. Faced with losses on their emergency stimulus program, they are likely to mark it as the RBA did.
The Swiss National Bank reported the largest first-half loss in its history in July, totaling 95.2 billion Swiss francs.
The RBA would hold the bonds until maturity because it would likely profit, offsetting its valuation losses. When the last of its bond holdings matures in 2023, the RBA could face losses of up to $35 billion and/or $58 billion.
The RBA has no plans to pay out dividends to the government in the coming years, preferring to use any profits to rebuild its capital position. So, they wouldn’t need cash injections from the government like they did in 2013 when their foreign currency reserves lost a lot of value.