Thoughts Around Balance Sheet Reduction Fleshed Out

The minutes from the RBA's May meeting also revealed that "members also discussed the reinvestment strategy for bond maturities of the stock of bonds purchased by the Bank during the pandemic. Although only a small value of government bonds held by the Bank would be maturing in 2022, the value of maturing bonds held by the Bank would start to rise with the April 2023 bond maturity."

• "One option was to reinvest bonds as they matured, which would maintain the stimulus associated with the stock of bonds held by the Bank, but would be inconsistent with the strength of the economy and the high level of inflation. By contrast, the option of not reinvesting bonds as they matured would mean the stimulus associated with bond purchases would be removed gradually and predictably. Members also noted that, while selling bonds would remove the stimulus provided by the Bank's balance sheet more quickly, that effect would be modest compared with the effect of increases in the cash rate. Moreover, the Bank's balance sheet would start to diminish quite quickly in 2023 as a significant share of the Term Funding Facility would roll off by September 2023, and the remainder would roll off by June 2024."
• "The Board decided that it would not reinvest the proceeds of maturing government bonds, consistent with the decision to start withdrawing from extraordinary monetary policy settings. However, the Board did not currently plan for the Bank to sell the government bonds it had purchased during the pandemic and it intended to allow the portfolio to run down in a predictable way as bonds mature. While contributing to the withdrawal of monetary stimulus, this would also recognise that the cash rate remains the primary tool for achieving the desired stance of monetary policy."
• "Members noted that in some years' time, after the Bank's balance sheet had reduced further, the Board would need to consider the broader issue of the longer-term optimal size and composition of the balance sheet, including the size of Exchange Settlement balances. In this context, it might consider the use of longer-term bond holdings, although this would be driven by the appropriate operating framework in light of evolving conditions and would not have implications for, or have a bearing on, the stance of monetary policy."