RBA Sees Some QE Benefits, Unlikely to Pay Dividend for a Period

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(Bloomberg) -- Australia’s central bank saw benefits from its quantitative easing program, though the ongoing costs are likely to prevent it from paying the government a dividend for some time, a review showed.

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The reduction in yields from the policy “lowered the cost of government debt issuance, and stronger economic activity than otherwise has increased tax revenues,” the Reserve Bank said in the review of its 15-month bond purchase program released Wednesday. “The ultimate cost will be known only once the last of the purchased bonds matures in 2033.”

The RBA reiterated in the findings that it intends to strengthen the way it considers scenarios when making policy decisions, especially where they involve unconventional measures such as bond purchases.

It is appropriate to deploy unconventional monetary policy “only in extreme circumstances” as bond purchases entail massive financial costs, the review found.

Australia resisted unorthodox policies until economic fallout from Covid-19 finally drained its remaining interest-rate ammunition. The RBA went on to buy securities, run a yield target, provide forward guidance, lend cheaply to banks and finally in November 2020, undertake QE, tripling its balance sheet to about A$650 billion ($435 billion).

The central bank scrapped the yield target late last year after yields surged during a bond market rout. In February 2022, the RBA announced it would no longer make any fresh purchases under QE because of the economy’s strong recovery. It then began tightening from May in consecutive monthly moves to take the cash rate to 2.35% from near-zero.

The RBA pointed out in the review that as rates rose, the financial cost of the bond purchase program increases.

The RBA said today its QE program had “offsetting financial benefits” for the broader public sector, with stronger growth and inflation as a result of super-easy monetary policy adding to the “seigniorage” it receives from issuing banknotes.

“The debt‐to‐GDP ratio is lower than otherwise as a result of the boost to nominal economic activity,” it added.

These benefits to government finances are “material” though difficult to quantify, the RBA said.

Deputy Governor Michele Bullock will elaborate on the review in a speech at midday at Bloomberg’s Sydney office.

Earlier this year, the RBA published findings of a separate internal review of its yield target policy which concluded that a “disorderly exit” caused the bank some reputational damage.

The central bank now faces its first independent review in a generation as Treasurer Jim Chalmers seeks to ensure Australia’s monetary policy making is up to date and in line with global peers.

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