MNI BRIEF: RBA Loss From Bond Buying Could Hit AUD58Bln

The Reserve Bank of Australia's review of its AUD281 billion Bond Purchase Program has warned of losses as high as AUD58 billion but that won't deter it from buying bonds again in "extreme" circumstances.

The BPP has made the Bank's earnings more "sensitive" to changes in interest rates as it pays more on Exchange Settlement balances - or bank reserves - than it receives from its bond holdings. The cumulative financial cost of the program over the period to 2033 is estimated to be between AUD35 billion and AUD58 billion based on different scenarios for the ES rate, which tracks the cash rate higher.

The RBA reported a AUD44.9 billion valuation loss on its portfolio, thanks to rising bond yields, and an accounting loss of AUD36.7 billion for the 2021/22 year compared to a loss of AUD4.3 billion last year.

Australian bond yields fell by 30bps and the spread between Federal Government bonds and State Government bonds was trimmed by 5-10bps, the review said, repeating findings from an assessment last year. The Bank said it "has not ruled out" the use of a BPP again as it offers more flexibility than yield curve control but entails higher costs.

The RBA said it was "difficult" to isolate the BPP's contribution to boosting growth. The 30bps decline in long-term interest rates and the 1% - 1.5% depreciation of the exchange rate associated with the BPP could add a cumulative AUD25 billion to nominal GDP over three years, it said.