Interview Interview on News 24 with Ross Greenwood

Well, we thought it would be extreme. And back in early 2020, when the pandemic was breaking, borders were closing down, there were great fears. We thought we needed to do all we could to support the economy.

So we put a package together. We cut rates, as you said. We did other things, actually we also put in place a term funding facility. There was something building of a financial crisis globally.

So, was that really, in your mind, even though in hindsight it never really turned into a financial crisis, that was the fear at that time?

Yeah.

And we were talking to our colleagues around the world at other central banks.

Bond markets were on the verge of shutting down. And if bond markets shut down – they're the key source of liquidity for banks – the world economy would be in a whole lot of pain.

And this was because, basically, COVID, the great unknown, businesses closing, unemployment at a mass scale. So, it needed a concerted effort from government and central banks.

Well, that was the fear, but the starting point was a possible financial crisis. Now, it never came to be because central banks acted and then governments acted very strongly. What central banks did is we cut the cash rate, we put in place the term funding facility, provided banks a lot of liquidity, and we also started to buy a few bonds to help banks un-gum these markets. They were sort of blocked up, if you like.

OK, so, when you buy bonds, somebody has got to willingly want to sell them to you. Were banks and others willing to sell those bonds to you at that time?

Yeah, we purchased them in competitive auctions, but, yes, there were sort of the – what are called the market makers, some of the banks that trade in these bonds regularly and help those markets work and be liquid, were just overfull on their balance sheets. So we took some off, that was what other central banks did, and those markets quickly functioned again, including because of all the other things central banks did, but all the things governments put in place at the same time.

So markets calmed down fairly quickly, but we were still faced with this really dire outlook for economies, with people being asked to basically stay at home, borders closed, and the health crisis still a major concern for everybody.

OK, so, at that point, you've cut the cash rate to 0.1 per cent. You were faced with a choice at that time. Other banks around the world had been faster than Australia to impose quantitative easing, to start buying these bonds from banks and others. Others, though, went to negative interest rates. That was a decision that our central bank also had to make.

Yeah, so, we didn't think negative interest rates would be helpful for the Australian system. And it was true many other central banks came to the same conclusion. Because we're a very bank-based system, we thought negative interest rates would actually do more harm than good.

So we also didn't pursue what's called quantitative easing straight away. We bought a few bonds to un-gum markets. We were buying bonds for some other reasons, the quantitative target that we put in place. But we weren't doing a classic quantitative easing. We saved that until later in the year. So, we came to that later.

OK. So, as you came to that, though, there was obviously a need at that time, you felt, to provide even more support for the Australian economy. You couldn't cut interest rates further than 0.1 per cent given where you were. So, it needed something more. What was the catalyst that really triggered the quantitative easing?

I think we were at the end, towards the end of 2020.

So, there's still no COVID vaccine at this stage. People are still locked down. Borders are still closed.

Yeah, international borders are still closed, no vaccine. We'd had a lot of success, the country, with JobKeeper, but that hadn't been extended yet. And the economy was not dire, but it was being supported extensively by the Government and by us. And we thought some extra stimulus was warranted at that point.

So the Board put in place this quantitative easing program. And one of the reasons why, I think, was because other central banks were doing this at some, to some extent, that was putting pressure on the Aussie dollar. And what it was tending to do was allow the Aussie dollar to appreciate.

And you didn't want the Australian dollar at that time to appreciate because that would have also had the impact of hurting the Australian economy?

It would have weighed on the economy and if you recall, we were trying to boost inflation. Inflation had been too low for too long. So an appreciation of the Australian dollar at that time would have been unhelpful.

So we thought we would do as others had done and start a bond purchase program to try and lower yields right across the curve. What we'd done already was the cash rate, was lower interest rates, overnight rates and very short-term rates, but we wanted to lower rates further out the curve at the sort of 3, 5, and 10-year points.

Even though you would have known that buying bonds at historically low interest rates could have caused those bonds in the longer term to be very many billions of dollars – tens, hundreds of billions of dollars underwater?

Yes, we were aware of those risks, but I think the thing that we hadn't appreciated, nor had anyone globally, was that we would come out of COVID so quickly and so strongly in terms of the economics.

The health outcomes were much better than people had anticipated. Of course, we faced the war in Ukraine that added some impetus to inflation. Monetary policy around the globe was very stimulatory and fiscal policies were very stimulatory. So no one appreciated the extent of the breakout in inflation that would occur.

So I mentioned really the pricing of the bonds and the fact that the Reserve Bank, unlike other central banks, always priced these bonds at their market value. So it meant we could see kind of how far underwater they were. You then made the next decision, as time went on to hold these to maturity and to not sell them and to crystallise those losses. Just explain that strategy.

Well, after the program ended, we then sort of put in place a sort of a rolling review of whether or not we'd sell the bonds. Some other central banks had decided to do that. Others had not. In the end, what we did is just allow those bonds to mature naturally without selling them back to the market.

Now, we didn't really need to sell the bonds in order to tighten financial conditions, to raise interest rates, because the cash rate was a sufficient tool for us, and it was no longer restricted when you're trying to raise the cash rate. The other consideration was we wanted to continue to provide the market with some stability and calmness but I think the third consideration was, by that point in order to sort of sell the bonds, you were probably going to pay a bit of a cost that we didn't want to have to pay and we decided it was likely to be more profitable to just hold those bonds until maturity.

Because it's also worth remembering that until this moment, in the years preceding, the Reserve Bank had been highly profitable and, in fact, had been paying the Government a dividend of around $5 billion a year.

Of course, those dividends have stopped, but the Government really hasn't had to put money in to subsidise the Reserve Bank subsequently because you've simply held those bonds.

Right. And as you said, you know, we've been operating with negative equity. That's not a problem for a central bank to continue to operate with that. And there is a plan, a plan to rebuild the Bank's equity, and that's taking place over a period of time.

But as we sit here, these bonds are starting to mature, and so the amount of bonds that you're holding now are significantly less. In fact, I think it's only in 3 years' time that most of these bonds will have pretty much come off your balance sheet.

So, this is almost the moment in history, as I say, as this massive bond portfolio is starting to unwind.

Just one question about that. Where is the money coming from that is paying the Reserve Bank back the money you need to have these bonds mature? Where's that money coming from?

So, whether or not we were holding the bonds, the Government has to repay the bondholders.

So, the Government's currently running a deficit. In order to fund that deficit and to repay the bonds that are maturing, they have to issue new bonds.

So, they're out there in the market issuing new bonds, and some of those funds are being used to repay us, but many of them are going back to repay private holders.

And as I said, the 10-year bond rate right now, around about 5.3 per cent.

So, these bonds are being basically refinanced, as it were, at a much, much higher rate of interest than what they previously have been.

Right. And the Government's not issuing all at that 10-year point, but, yes, they are having to refinance at higher rates than in the past, than, you know, many years ago.

OK, so then looking back in hindsight, and I know there have been reviews by the Reserve Bank into this, was it the most effective monetary policy tool at the time that the Reserve Bank had?

I think our conclusion from looking at that program and all of them, and we've done a review looking forward to what might we do in the future, I think our conclusion was it wasn't the most effective of tools. Indeed, we knew that going in, which is why in early 2020, we didn't start with QE. It came later. Yeah.

We did other things we thought were much more effective. And I've mentioned the term funding facility, providing banks with low-cost funding for 3 years or so. That had a big impact. There were other things, just lowering the cash rate and keeping it there, that were very effective.

This was less effective I think and that wasn't surprising though. But we wouldn't rule out using it in the future. One of the things that was very effective with our bond buying – and it wasn't related to the QE, the later purchases starting in 2020 – but the early ones were addressing the market dysfunction. When those bond markets were jammed up and shutting down, that's really critical for us.

And just one final thing. We talked about more than $300 billion worth of bonds which were issued at the time and which are now rolling off. What was the impact in interest rate terms? Have you tried to work that out as to what was the impact of all of those bonds that you bought, all of the pain you caused to the balance sheet? What was the impact of it?

Yeah, we have, and they're imprecise, but our best estimates think that the overall program probably reduced yields across the curve by the order of about 30 basis points, so a bit more than a standard cash rate cut. Now, you might sort of say, well, that didn't buy us very much.

I think there were other effects. There was a benefit to the exchange rate that I've discussed, and I think that obviously came through. But I think you have to go back to the circumstances at the time. It was late 2020. JobKeeper was rolling off. We had no vaccine. We still faced locked international borders, the prospect of breakouts and further lockdowns. And remember right through 2021 we had our major capital cities in Australia locked down entirely. We were still working from home. So, we still faced a significant crisis, including an economic one, that had to be dealt with.

And as you look back on your career now – you've been doing this for a long, long time, is that one of the seminal moments, one of the moments that you refer back to in your own career in trying to manage monetary policy and the financial system in Australia? Because part of the mandate for the Reserve Bank is financial stability.

Absolutely. But I think that the really seminal point was that early period when the pandemic was breaking out. We put that first package in place, and I think that was, you know, absolutely critical to fixing financial markets, returning some confidence to financial markets, and hence the economy, and helping people get through the pandemic.

Christopher Kent, it's good to have a chat to you about that. It is historic, and I appreciate your time.

Thanks very much, Ross. Thanks.