Australia's central bank expects smooth unwinding of balance sheet

Australia's central bank expects the unwinding of its balance sheet to run smoothly, but as the bank's bond holdings fall, the process of private sector absorbing more issuance might place modest pressure on yields, a senior official said on Wednesday.

David Jacobs, head of domestic markets at the Reserve Bank of Australia, said around A$20 billion of purchased bonds have matured and the pace would pick up to A$35-45 billion per year.

"We expect this process to run smoothly, though are attentive to the challenges involved," Jacobs told Australian Government Fixed Income Forum in Tokyo.

Around A$4 billion out of a total of A$188 billion lent to commercial banks under the Term Funding Facility - another emergency stimulus program begun in 2020 - have been repaid, with large maturities due ahead of September this year and June next year.

Much of the extra cash created by the QE program is held by the banks in their exchange settlement (ES) accounts at the RBA, which is also expected to decline rapidly.

"This has the potential to cause some strains, even though ES balances will remain abundant," said Jacobs, noting that reserves would roughly halve between now and June next year.

"We will monitor this closely and respond if necessary, but our expectation is that the process will run smoothly."