Low interest rates around the world are hurting the Reserve Bank of Australia’s bottom line and are stopping it from restoring its reserve fund quickly.
The Reserve Bank Reserve Fund (RBRF) stood at $2.5 billion at the end of the 2012/13 financial year. Its primary purpose is to provide a capacity to absorb losses.
In the RBA’s annual report, released on Thursday, governor Glenn Stevens said no dividend will be paid to the government this year with the money paid instead to the reserve fund.
“The board’s view is that the earnings should be devoted in their entirety to rebuilding the Reserve Bank Reserve Fund, the Bank’s main permanent capital reserve, which had been depleted by the large accounting losses in 2009/10 and 2010/11.”
“The board considers that further transfers to this reserve will be needed in future years to restore its balance to a level that adequately reflects the Banks risks.”
The large accounting losses were caused by low interest rates and the Australian dollar’s surge that took it above parity with the US dollar.
In 2011/12 the RBA paid a $500 million dividend to the Federal government and kept $596 million for transfer to the RBRF.
“In 2012/13, the Treasurer determined that all earnings available for distribution be credited to the RBRF,” the RBA said.
“With this transfer of $588 million, the balance of the RBRF at 30 June 2013 stood at $2.501 billion.”
In addition, Treasurer Joe Hockey on Wednesday announced an $8.8 billion grant to the RBA to strengthen its ability to implement monetary policy and foreign exchange operations.
The only way the RBA can boost its reserve fund is by retaining net profits or by grants from the federal government.
The RBA said in the report that underlying earnings were still “exceptionally low in historical terms”.
“The bank said low levels of interest rates in Australia and in the countries in which Australia’s international reserves are held are the factors in keeping underlying profits low.”
In the 12 months to 30 June 2013, the RBA recorded an accounting profit of $4.313 billion, up from $1.076 billion the previous financial year, the RBA’s annual report said.
Underlying earnings were $3.725 billion in 2012/13, compared to a loss of $39 million the previous year.
The Reserve Bank’s underlying earnings come from interest on almost all of its assets while it pays no interest on a large portion of its liabilities including banknotes in circulation and capital and reserves.
