The RBA has reported significant financial losses, now amounting to some $43 billion, resulting from its extraordinary pandemic stimulus measures.
These losses have pushed the RBA's balance sheet deeper into negative equity territory, raising concerns among economists and financial experts.
Several factors at play
The losses stem from a combination of factors, including rising interest rates paid by the RBA to commercial banks and a decline in the value of the RBA's government bond portfolio.
In its annual report, the RBA revealed an accounting loss of $6 billion for the last financial year, compounding the $36.7 billion loss from the previous year.
As a result of these losses, the RBA's balance sheet has plunged further into negative equity, reaching a position of -$17.7 billion in 2022-23 – meaning that the value of the RBA's liabilities now exceeds the value of its assets.
The rub is, unlike a commercial bank or business, a government-backed central bank with the ability to print money cannot be insolvent.
Long-term sustainability of the bank
Economists are raising red flags about the long-term implications of this financial situation. The RBA projects that its negative equity position may widen to as much as $27 billion by 2025, and may not return to positive capital until the 2030s, under various interest rate scenarios.
Former RBA board member Warwick McKibbin and former Treasury official Peter Downes have called for the government to inject emergency capital into the central bank to bolster its balance sheet.
They argue that a swift recapitalisation is essential to ensure the RBA's ability to act as a lender of last resort during crises.
Downes emphasised the importance of restoring the RBA to positive capital sooner rather than later to avoid complications during extreme events, suggesting that the government should consider a recapitalisation several times larger than the $8.8 billion capital injection made in 2014.
Bank and government say no
Despite these calls for intervention, both the RBA and the government have maintained that a recapitalisation is not necessary, and the central bank can effectively operate monetary policy despite its position.
It's expected that the government will not receive its usual annual dividend of around $2 billion for at least a decade as the RBA rebuilds its financial reserves.
The RBA's losses are attributed in part to its quantitative easing measures, and some experts suggest that the RBA could offset these losses by reducing the interest rate paid to commercial banks on excess reserves.
However, RBA officials have argued that such a move would interfere with monetary policy transmission.
As the RBA grapples with these financial challenges, the government faces a delicate balancing act between supporting the central bank's financial health and maintaining budget surpluses.