The Reserve Bank of Australia will resort to a bond purchase program “only in extreme circumstances”, the board said in minutes of its meeting two weeks ago.
The board reviewed the operation and effectiveness of the bond purchase program introduced in November 2020, as part of the second package of monetary policy measures implemented by the RBA in response to the effects of the COVID-19 pandemic.
The discussion was based on a staff review commissioned by the Board.
The BPP involved purchasing government bonds in order to lower yields at the 5–10 year part of the yield curve. The program was introduced to complement the price-based, three-year yield target introduced in March 2020 and the Term Funding Facility, along with the longstanding overnight cash rate target, which forms the anchor point for the risk-free interest rate term structure.
Together, “the policy measures had lowered the whole structure of interest rates in Australia and supported confidence in the economy,’ the RBA said.
“Members observed that the BPP, together with the other monetary policy measures put in place during the pandemic, had contributed to the strong recovery of the Australian economy, with unemployment having declined to its lowest rate in almost 50 years.
“However, members noted that it is difficult to identify the exact effect of the BPP on the economy, because it was implemented as part of a broader package of policy measures that reinforced one another.
“Moreover, a key benefit of the policy package was to provide insurance against the significant downside risks the economy was facing during the pandemic – a benefit that is inherently very difficult to quantify, especially given that downside risks were avoided.”
The RBA board “noted that the BPP had affected the public sector balance sheet in several ways”.
“There is expected to be a financial cost to the Bank because the purchased bonds pay a fixed return, while the interest paid on the Exchange Settlement (ES) balances created to finance the bonds varies with monetary policy settings and so rises as monetary policy is tightened.