RBA Kent: Not Selling Bonds To Avoid Perception Of “Seller”

From RBA Assistant Governor Christopher’s speech Monday
--RBA considered options to reduce Exchange Settlement balances more quickly
--RBA currently has no plans to sell bonds from its portfolio
--RBA wants to ensure market doesn’t assume “once a seller, always a seller”
--As bond holdings mature, their contribution to lower bond yields will slowly diminish

By Sophia Rodrigues

(Sydney, May 23, 2022)--  The Reserve Bank of Australia decided against selling bonds from its portfolio “currently” because it believes avoiding sales this time around would ensure any bond-buying program will remain effective in the future, a senior official said Monday.

RBA assistant governor for financial markets Christopher Kent made the comments in a speech to the KangaNews DCM Summit 2022.

“Should a bond buying program be needed in the future to provide support to the economy, it would be likely to be more effective if sales are avoided this time around,” Kent said.

This is because the effect of those purchases on bond yields and the exchange rate would be lessened if the market anticipated a fast run down of holdings next time around.

“In short, the market would probably assume ‘once a seller, always a seller’,” Kent said.

CB-Intel wrote a story on this on April 14, where we said the primary motivation for not selling bonds outright is the credibility factor.

Other reasons to decide against selling bonds are that the RBA judged raising the cash rate was the best way to reduce the extent of monetary stimulus in the economy, and bond sales could potentially complicate the issuance task of federal, state and territory authorities.

Kent said that as the bond holdings mature, their contribution to lower bond yields will slowly diminish. The maturity will be gradual, keeping the Exchange Settlement balances large for some years.

This means the cash rate will continue to trade slightly below the cash rate target but above the rate paid on ES balances, Kent said.

The RBA’s estimates suggest the bond purchase program reduced longer-term Australian government bond yields by around 30 basis points and lowered the spread of yields on semis to AGS by around 5bps-10bps.

Kent said the RBA considered options to reduce ES balances more quickly but judged the benefits of doing that were modest compared with the risks, including the potential to create volatility in financial markets.

--Contact: Sophia@centralbankintel.com