RBA’s Kent: Australia’s central bank balance sheet to shrink only slowly

Reuters reported that ”Australia’s central bank on Monday projected its A$600-billion ($423.66 billion) balance sheet would remain large for some years to come as bonds it bought under quantitative easing slowly mature and repeated it had no plans to sell its holdings early.”

The news agency was reporting on the Reserve Bank of Australia (RBA) Assistant Governor Christopher Kent’s comments who said only around A$4 billion of bonds were maturing this year, with another A$13 billion in 2023.

Key notes

”Maturities would then range from around A$35 billion to A$47 billion a year out to 2031, before tailing off by 2033, Kent told a KangaNews bond conference.”

”The A$188 billion lent to commercial banks under the Term Funding Facility, another emergency stimulus program begun in 2020, will also be paid in 2023 and 2024, further shrinking the size of the RBA’s balance sheet.”

”Much of the extra cash created by the QE program is held by the banks in their exchange settlement (ES) accounts at the RBA, which currently amount to about A$439 billion.”

”This will decline as TFF loans are repaid and the RBA’s bonds mature, but will likely remain larger than before the pandemic.”

”Kent said the RBA had considered running down these ES balances more quickly but had decided that could create unwanted volatility in financial markets.”

”This abundance of funding in turn means the actual overnight cash rate is trading slightly below the RBA’s official target for the cash rate, though usually within 10 basis points of it.”

‘”Most importantly though, the Bank will continue to be able to maintain effective control over the cash rate as it withdraws monetary policy stimulus in the period ahead,’ said Kent.’

RBA in focus

All eyes are on whether the RBA will ramp up around 125bps of hikes in 2022. The data of late leaves doubts over the RBA’s next move. 

The ”wage and employment data haven’t, in our view, met Governor Lowe’s threshold of there needing to be “a very strong argument” for the RBA to “deviate” from moves of 25bp in coming months,” analysts at ANZ Bank said in a note. 

”Especially when the minutes from the May meeting highlighted that the Board meets monthly, so has ‘the opportunity to review the setting of interest rates again within a relatively short period of time.’

Still, we think the option of a 40bp move will be considered at the RBA’s June meeting before a move of 25bp is chosen.”

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