MNI POLICY: Any RBA QT Sales To Be Gradual And Slow

The Reserve Bank of Australia would sell its bond holdings incrementally over a long time period to reduce impact on financial markets, while reducing its interest-rate risk, should the board decide to conduct quantitative tightening after Sept 30, MNI understands.

Major banks will pay back a large proportion of money borrowed during the depths of the pandemic via the term-funding facility in September and a decision – if any – will come after the Reserve gauges the market impact of those maturities. Despite recent media reports to the contrary, the RBA has not solidified its plans or the mechanism QT could use, such as selling the bonds back to the government’s bond issuer, the Australian Office of Financial Management, or offering them publicly.

Should the RBA sell bonds, the amount offered each round will be marginal and the Reserve would likely only commit to selling small fractions, whether that be per quarter, month or week – not the entire portfolio. The sales would be negligible in terms of their monetary tightening effect, with a sale of the RBA’s total portfolio of bonds only likely equating to a 30bp rise in the cash rate. The Reserve would rather hike interest rates should it deem further tightening necessary, MNI understands.

The RBA Board reviewed plans to reduce its government bond holdings at the May 2 meeting, according to the minutes. David Jacobs, its head of domestic markets, told an audience in Japan that month the Board had agreed to hold its AUD300 billion portfolio until maturity (see chart below), but noted it would review the strategy in future. MNI reported in May a rapid sale of the Reserve's entire portfolio was highly unlikely. (See MNI: RBA QT Seen Unlikely, Would Have Little Impact)

BOARD CONSIDERATIONS

The RBA prices the bonds mark-to-market, so they have lost value as interest rates increased and represent greater risk should rates move higher, pushing the Reserve’s balance sheet further into negative equity. However, selling the bonds would mean the Reserve misses the chance to recover losses should interest rates fall, or the bonds mature over time – factors the board will weigh after September. Selling the bonds, unless for a profit, will also not push the RBA’s balance sheet back into positive territory. The bank recorded a AUD12.4 billion net-equity loss in its last annual report (see chart).

The board will also weigh protecting the effectiveness of any future quantitative easing. Should it decide to sell bonds, this may dull the market’s perception of QE, as the RBA initially stated it would hold the bonds to maturity. Whether the board believes QE will be a tool used in future will be factored in.

Any decision to sell the bonds would also be made in conjunction with the AOFM, as a sale could impact the office’s ability to issue Australian Commonwealth Government Bonds, irrespective of whether the Reserve decides to place the transactions with the state issuer.

TFF MATURITIES

Australian banks borrowed AUD188 billion of three-year debt from the RBA via the TFF over two drawdown rounds between 2020-2021 (see chart). While bank-bond issuance has picked up over the last two years, the major banks have ample liquidity sitting in exchange-settlement (ES) accounts they could draw on to repay the debt.

However, any use of ES money will impact the banks’ liquidity coverage ratios. While capital-market funding is the more efficient option, should markets suddenly close due to unforeseen volatility – such as further overseas banking turmoil – the banks could be forced to dip into their ES accounts to repay the TFF. The liquidity coverage ratios of the major Australian banks, however, remain well above minimum requirements.