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RBA would consider bond purchase program in future

The Reserve Bank will consider buying government bonds in future ‘extreme circumstances’. Picture: NCA NewsWire/Joel Carrett
The Reserve Bank will consider buying government bonds in future ‘extreme circumstances’. Picture: NCA NewsWire/Joel Carrett

The Reserve Bank will consider the “extraordinary” move of buying government bonds in future “extreme circumstances” should interest rates hit rock bottom again.

The RBA has published a report of the bond purchase program (BPP) it introduced at the height of the Covid-19 pandemic.

It said the tool played a role in keeping Australia’s economy relatively strong.

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Interest rates were lowered to just 0.10 per cent in November 2020, and with monetary policy pushed as far as it could go, the RBA introduced the BPP to further loosen conditions.

The program contributed to overall budget saving, the report said, however, the central bank was unsure to what extent the program was overall effective.

It comes a day after Treasurer Jim Chalmers offered a cautious statement that the budget was $50bn better off than expected.

The Reserve Bank introduced the ‘extraordinary’ bond purchasing program during the Covid-19 pandemic to protect the economy. Picture: NCA NewsWire/Joel Carrett
The Reserve Bank introduced the ‘extraordinary’ bond purchasing program during the Covid-19 pandemic to protect the economy. Picture: NCA NewsWire/Joel Carrett

Between November 2020 and February 2022, $281bn of government debt was purchased – 80 per cent of which was federal, the other 20 per cent state.

At the time, the government borrowed billions of dollars to fund pandemic support measures.

Initially, the program purchased $100bn of bonds of maturities of around five to 10 years at a pace of $5bn a week.

The program was extended several times, including in February 2021 when a further $100bn of bonds were purchased.

The program would eventually slow down, concluding in February at a purchasing rate of $4bn a week.

The RBA review reveals the central bank would consider making the move again if interest rates hit rock bottom. Picture: NCA NewsWire / Gary Ramage
The RBA review reveals the central bank would consider making the move again if interest rates hit rock bottom. Picture: NCA NewsWire / Gary Ramage

In its review, the RBA said the BPP was estimated to have lowered longer-term Australian government bond yields “by around 30 basis points”.

“Together with the other policy measures, the BPP was successful in achieving its objectives of further lowering the whole structure of interest rates in Australia, reducing borrowing costs to record lows and contributing to a lower exchange rate than otherwise,” the review said.

“However, it is difficult to isolate the effect of the BPP on the economy. Regardless, it is clear that the economy recovered very strongly from the pandemic. Economic activity is growing strongly and unemployment is now at an almost 50-year low.”

The report comes as the RBA is likely to raise rates once again next month in what would be the sixth-straight month of rate hikes.

Rates will likely increase another 50 basis points in October and in subsequent months before peaking at 3.6 per cent next February.

In terms of the general government balance sheet, the BPP resulted in government debt being issued at a lower fixed cost than otherwise.

“The economic stimulus from the BPP also contributed to a budget saving for the government via its positive effect on economic activity and nominal income,” the review said.

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