While there is a lot of focus on what the Reserve Bank, the US Federal Reserve and other central banks are doing with interest rates, in the background is another process that will also tighten financial conditions and help push rates even higher.
The ECB’s balance sheet swelled from about $US1.5 trillion pre-GFC to more than $US5 trillion pre-pandemic to more than $US9.5 trillion.The RBA, late to deploy unconventional policies, spent about $280 billion buying Australian government and semi-government bonds between November 2020 and February this year, when it halted the program. It also provided $188 billion of term funding to banks and other financial institutions at minimal interest rates.
It was particularly good for the riskiest of assets, like crypto assets or technology stocks with good prospects but modest, if any, earnings. Between October 2017 and September 2019 the Fed did try to unwind some of its purchases in a program that peaked with net shrinkage in its balance sheet of $US50 billion a month.AP
In Australia the RBA is allowing its hoard of government and semi government bonds to run off as they mature. Because it bought mainly relatively short-dated bonds – other central banks were buying some bonds with 20 to 30 year maturities -- the process of restoring its balance sheet to a level that it feels is more aligned to financial conditions will be quicker than the Fed’s or Bank of England’s.
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