A brilliant little post from a senior interest rate strategist:
In Australia’s case, the RBA would be selling AUD with a cost of funds of 25bps below the target overnight cash rate. Assume for the moment that the RBA’s policy rate is steady at 3.5% (a weaker AUD would mean that there is little prospect of further rate cuts), and that the RBA needs to sell about 500bn of AUD to make a meaningful impact.
The RBA is likely to purchase a mix of highly rated foreign Bonds with about a 5yrs maturity — on that portfolio it would be lucky to earn an annual yield of 1% per annum.
If this were the case, the RBA would be paying 3.25% on 500bn (~16.25bn per annum), and earning 1% on the amount (~5bn per annum) – for a total cost of 11.25bn per year.
Who pays this? The Australian Taxpayer — for the RBA’s balance sheet forms a part of the Australian Government’s consolidated accounts.
And that’s not the final cost to the tax-payer — most taxpayers are net importers, and the weaker value of the AUD would lower their real consumption wages.
