Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 534

The RBA’s QE losses

Accounting losses from a pandemic inspired bond buying spree has wiped out the Reserve Bank of Australia’s (RBA) equity and more, pushing its balance sheet into negative equity territory.

Its 2022/23 annual report shows a loss of $6 billon for the financial year, which following the $36.7 billion loss in the previous year, now has the bank’s liabilities $17.7 billion in excess of its assets (see chart). But being a government entity that can create money to pay its bills, it remains secure.

How it happened

How did the RBA get into this predicament? To understand why the RBA is losing money, we need to follow the flow of money building up to the losses.

When the pandemic exploded in early 2020, the federal government commenced fiscal support packages such as JobKeeper, raising government debt significantly. At the same time, the RBA introduced unprecedented monetary stimulus including ultra-low interest rates and increased commercial bank reserves via quantitative easing (QE).

When the federal government raises debt, it is a loan to the government from the private sector via commercial banks. The banks transfer deposits to Treasury, and a matching liability of government debt arises. That debt is recorded as an asset for the banks, offset by the loaned funds it transferred to Treasury. Treasury pays interest on the government debt to the banks. The resulting balance sheet movements are depicted:

When QE occurs, it is mostly seen as money creation. But it could also be construed as a loan, this time from the private sector to the RBA. Being the “borrower", the RBA gains an asset and a liability, in the form of government debt and commercial bank deposits respectively. The deposits having been created electronically by the RBA, which only central banks can do. The RBA pays interest on those deposits to the banks. Again, the balance sheet movements:

When QE and government debt raising occurs simultaneously, the commercial banks' balance sheets net out, leaving:

If Treasury then transfers its deposits to the private sector to fund say a JobKeeper scheme, then the RBA will have effectively financed that fiscal spending via electronically created deposits. That financing will remain in place until such time that the RBA pays back the government debt it “borrowed” from the banks, and its self-created liabilities are extinguished.

The impact of interest rate rises

The illustrative RBA balance sheet built above reveals a double whammy when interest rates rise. On the assets side, the value of the debt it holds falls with rising interest rates. And on the liabilities side, higher interest rates translate into higher servicing costs on the commercial bank deposits created in the QE process.

With the RBA purchasing some $330 billion worth of government bonds during the QE program at a coupon of around just 0.25%, a rapid rise to 4.1% in the official cash rate has wreaked havoc on the mark-to-market value of its portfolio. And what began as a cost of just 0.1% on the increased bank deposits, has blown out substantially with 4.1% now being paid.

With less than ten per cent of its bonds holdings having matured thus far, the RBA at this stage does not plan to actively sell bonds to wind down its portfolio faster, which would realise capital losses. All the while recognising the risk of further losses if interest rates continue to rise.

This situation is not confined to Australia, with central banks in other advanced economies suffering extensive losses with their QE programs.

The lessons

The question might therefore be asked, did central banks go into the QE caper with eyes wide shut, given the poor financial outcomes of high inflation, rapidly increasing interest rates, and impaired central bank balance sheets?

Many would say that losses should have been expected when buying low-yielding bonds, and when interest rates can really go only one way, up. And that it was not such a good idea after all. While others would say that the stimulus kept businesses afloat, unemployment low, and that it was all for the greater economic good.

In the fullness of time, governments will need to balance whether significant monetary stimulus is appropriate in times of global turmoil, being mindful that there really is no such thing as a free lunch.

 

Tony Dillon is a freelance writer and former actuary. This article is general information and does not consider the circumstances of any investor.

 

  •   8 November 2023
  • 3
  •      
  •   

RELATED ARTICLES

The RBA's balancing act

This 'forgotten' inflation indicator signals better times ahead

This vital yet "forgotten" indicator of inflation holds good news

banner

Most viewed in recent weeks

Australian stocks will crush housing over the next decade, 2025 edition

Two years ago, I wrote an article suggesting that the odds favoured ASX shares easily outperforming residential property over the next decade. Here’s an update on where things stand today.

Building a lazy ETF portfolio in 2026

What are the best ways to build a simple portfolio from scratch? I’ve addressed this issue before but think it’s worth revisiting given markets and the world have since changed, throwing up new challenges and things to consider.

Get set for a bumpy 2026

At this time last year, I forecast that 2025 would likely be a positive year given strong economic prospects and disinflation. The outlook for this year is less clear cut and here is what investors should do.

Meg on SMSFs: First glimpse of revised Division 296 tax

Treasury has released draft legislation for a new version of the controversial $3 million super tax. It's a significant improvement on the original proposal but there are some stings in the tail.

Property versus shares - a practical guide for investors

I’ve been comparing property and shares for decades and while both have their place, the differences are stark. When tax, costs, and liquidity are weighed, property looks less compelling than its reputation suggests.

10 fearless forecasts for 2026

The predictions include dividends will outstrip growth as a source of Australian equity returns, US market performance will be underwhelming, while US government bonds will beat gold.

Latest Updates

Economy

Ray Dalio on 2025’s real story, Trump, and what’s next

The renowned investor says 2025’s real story wasn’t AI or US stocks but the shift away from American assets and a collapse in the value of money. And he outlines how to best position portfolios for what’s ahead.

Superannuation

No, Division 296 does not tax franking credits twice

Claims that Division 296 double-taxes franking credits misunderstand imputation: franking credits are SMSF income, not company tax, and ensure earnings are taxed once at the correct rate.

Investment strategies

Who will get left holding the banks?

For the first time in decades, the Big 4 banks have real competition in home loans. Macquarie is quickly gain market share, which threatens both the earnings and dividends of the major banks in the years ahead.

Investment strategies

AI economic scenarios: revolutionary growth, or recessionary bubble?

Investor focus is turning increasingly to AI-related risks: is it a bubble about to burst, tipping the US into recession? Or is it the onset of a third industrial revolution? And what would either scenario mean for markets?

Investment strategies

The long-term case for compounders

Cyclical stocks surge in upswings but falter in downturns. Compounders - reliable, scalable, resilient businesses - offer smoother, superior returns over the full investment cycle for patient investors.

Property

AREITs are not as passive as you may think

A-REITs are often viewed as passive rental vehicles, but today’s index tells a different story. Development and funds management now dominate earnings, materially increasing volatility and risk for the sector.

Australia’s quiet dairy boom — and the investment opportunity

Dairy farming offers real asset exposure, steady income and long-term growth, yet remains overlooked by investors seeking diversification beyond traditional asset classes.

Sponsors

Alliances

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.