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The outlook for the global economy is "quite worrying" and it has implications for Australia, a Reserve Bank official has warned.
Key points:
- The RBA says its emergency bond-buying program broadly achieved its aims
- Deputy governor Michele Bullock says there are problems in the global economy that could threaten Australia's recovery
- The RBA's ability to create money supported the economy through the pandemic
Deputy governor Michele Bullock says there are mounting problems in the United States, Europe, and China, and things are on "a bit of a knife edge."
The RBA was still planning to keep lifting interest rates, she said, partly to convince Australians that high inflation won't become embedded here.
But a number of things could go wrong in the global economy that would undermine the RBA's attempt to steer Australia safely through its rapid rate-hiking cycle, she said.
She has also explained how the RBA's ability to create money helped to support Australia's economy through the pandemic.
Many risks around the world
Ms Bullock listed the key risks in the global economy.
She said China's zero-COVID approach would continue to wreak havoc with global supply chains, and with Chinese demand.
The extensive problems with China's property market were also a concern, given property accounted for a third of the country's economy.
She said the United States was struggling with excess demand and rapidly rising wages and inflation, and the US Federal Reserve will need to keep lifting interest rates "quite sharply" to dampen economic activity.
Then there was Europe, which had "its own problems."
"It's got inflation, but it's also got a massive energy shock which is going to impact their production," she said.
"So ... I think the outlook for the world economy is looking quite uncertain and quite worrying, and that obviously has implications for us because of the tendency [for those things] to flow through to commodity prices.
"This is something at the moment that I think is ... very uncertain, and it's on a bit of a knife edge," she said.
The RBA will not become insolvent
Ms Bullock made the comments during the Q&A session after a speech to Bloomberg in Sydney.
In her prepared speech, she talked about the lessons the RBA had learned from using unorthodox policies during the pandemic.
She said the RBA's extraordinary bond buying program had resulted in the bank holding around $356 billion in Australian government bonds and state government bonds by the end of June this year (see the graph below).
She said the bond buying program and other policies had broadly achieved their aim, helping to support the economy and employment through very uncertain times.
She said one outcome of the bond purchases had been that the bank would report a substantial accounting loss in its 2021/22 annual accounts, resulting in the bank being in a position of "negative equity."
However, she said people needn't worry about that because central banks are not like normal banks.
She said there was no risk the RBA would become insolvent.
"If any commercial entity had negative equity, assets would be insufficient to meet liabilities and therefore the company would not be a going concern," she said.
"But central banks are not like commercial entities. Unlike a normal business, there are no going concern issues with a central bank in a country like Australia. Under the Reserve Bank Act, the government provides a guarantee against the liabilities of the Reserve Bank.
"Furthermore, since it has the ability to create money, the bank can continue to meet its obligations as they become due and so it is not insolvent.
"The negative equity position will, therefore, not affect the ability of the Reserve Bank to do its job," she said.
She said the RBA thought it was still prudent to return to positive equity at some point in the future, and it would get there eventually.
"Despite the fact that the bank can continue to operate with negative equity, the board’s view is that it is important that the bank return to positive equity over time," she said.
"The board has communicated this to the government. While it has not sought a capital injection, the board has indicated to the government that it expects that future profits will be retained by the bank until the bank’s capital is restored.
"The treasurer has endorsed this general approach, noting that under the Reserve Bank Act the issue of distributions to the government is considered each year," she said.
She also said people should understand that the $356 billion in Australian government bonds held on the RBA's balance sheet were actually liabilities issued by the federal government.
"So, while the bank will report a large valuation loss in 2021/22, the government's debt issuer – the Australian Office of Financial Management (AOFM) – will report a significant valuation gain," she said.
"For the whole of government, therefore, the bank's loss on this part of its portfolio will net off against the AOFM's gain."
She said that interaction between the AOFM and the RBA underpinned the money creation that supported the economy through the pandemic.
"We can create money," she said during the Q&A. "That's what we did when we bought the bonds. We created money and bought the bonds."
Positive outcome overall
Overall, Ms Bullock said the policy measures used by the RBA in the pandemic were a good thing for the economy.
"Because of all of these extraordinary measures, the economy has done very well," she said.
"The budget deficit is looking a lot better this year and one of the reasons is because welfare payments are down, and that's because unemployment is at its lowest level in 50 years, and the bond purchase program ... helped to contribute to that," she said.
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