Reserve Bank of Australia incurs annual loss on bond holdings

Over the last 15 years the central banks have faced all kinds of pressure and unexpected developments. The latest in the list is australias central bank. I had pointed to an earlier speech by one of the central bank officials that the central bank expects to face losses this year.

The 2022 annual report released today confirms the loss.

From the Governor’s Foreword:

The combination of higher inflation, a strong labour market and the underlying resilience of the economy has meant the Board has increased interest rates earlier, and more quickly, than previously expected. The monetary policy support implemented over the past couple of years has helped insulate the economy from the worst effects of the pandemic, but the challenge facing monetary policy has now changed. The task ahead is to return inflation to target while keeping the economy on an even keel. It is possible to do this, but the path is a narrow one and clouded in uncertainty, not least because of developments elsewhere in the world.

The rise in bond yields that has accompanied the stronger economy and higher inflation has resulted in significant valuation losses on the Bank’s holdings of government bonds. As a result, the Bank has recorded an accounting loss of $36.7 billion this year, which has reduced its equity to negative $12.4 billion. This negative equity position does not affect the Bank’s operations or its ability to operate effectively or perform its policy functions.

The Board expects that the Bank’s capital will be restored over time due to positive underlying earnings and capital gains when bonds mature. Accordingly, it has not sought a capital injection from the government. Instead, the Board’s strong expectation is that future distributable earnings will be retained by the Bank to restore its capital, rather than paid as dividends to the government. The Treasurer has indicated his support for this approach, noting the situation will be reviewed each year.

 

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