The Printer and the Shredder: Reserve Bank has neat trick to tackle rising interest rates

by Michael West | Oct 29, 2021 | Finance & Tax

Rates went ballistic this week but the Reserve Bank has a secret weapon for tackling inflation. But who would have thought it would entail Dan Andrews paying Josh Frydenberg? Michael West reports.

Victorian Premier Dan Andrews might not have twigged yet, and he will hardly be over the moon when he does, but he is giving his nemesis Josh Frydenberg some money. 

Circuitously. A $640m issue of Victorian state bonds matures today. That money goes to the Reserve Bank, which in turn pays the Federal Treasury some $2b a year in dividends.

Dan will be happy to know that the RBA, and we have had this confirmed, will be shredding the bonds, or rather cancelling that $640m as if it never existed. It will vanish, as will much of the government debt, the billions of dollars in new money created by QE, created to get Australia through the Pandemic.

However, the RBA has been getting income from the bonds, the interest payments on the bond coupons, and the RBA pays dividends, not to the states, but to the Commonwealth.

It is no small irony then, in light of the political rivalry, the barbs shot back and forth between Labor premiers and the Treasurer over lockdown and pandemic funding, that the Feds have been, and will continue to profit from the millions in interest rate payments on state bonds.

Josh Frydenberg would no doubt like it if the full $640 million, and the billions to come in maturing government bond issues, came his way too. It would surely help him tackle the biggest debt and deficit in Australian history.

But the principal on these bond issues will be cancelled with the tap of a computer keystroke by the Reserve Bank. When Josh used to say there is no money tree, he was of course wrong. There is a money tree, it’s called QE. And when he and his Coalition colleagues used to say our children’s children’s children will be paying Labor’s debts, they were wrong too. 

One set of children will simply be paying another set of children.


Interest rates went ballistic yesterday, the sharpest one-day rise in a long time in response to a bump-up in the inflation numbers. Yet Governor Philip Lowe and his deputy Guy Debelle have a neat trick up their sleeves, a stabiliser if you, to combat rising rates.

Although the government, and the Opposition for that matter, have collectively decided to ignore – not even mention – the sea-change in economic management which is “printing money”, or pursuing MMT, rather than traditional economics, the financial management of the Pandemic has all worked rather nicely, thanks to the stewardship of the RBA. 

Their latest trick is simply cancelling the debt as it matures. As the billions in bond issues mature, with a mere tap of a computer keystroke, the new billions in “printed money” will disappear.

If the Reserve Bank were not independent, things could be different. Josh might have leaned on them to pay the entire $640m to fix his deficits; and the rest. Instead, the new money will be digitally shredded.

To the detail. Three years ago the Victorian government issued $2b in bonds  at an interest rate of 2.25%. That was October 29, 2018.

Last year, the RBA bought $624m in three transactions on April 8 and 19, and on May 20.

The central bank paid around $650m (in new money). They paid more than face value because interest rates had fallen.

Interred in the bank’s reports, they note they will hold the bonds until maturity (last week’s annual report).

So pay day is today. And when that money hits the RBA’s account, they will delete it. In the parlance of Josh’s fabled money tree, the RBA has grown a very large money tree for him to pay for schemes such as JobKeeper.

Yet now, the leaves are falling and the RBA will sweep them up from under the tree and incinerate them to leave net zero impact on money supply. This also means that the bank has a you-beaut new weapon to combat inflation.

It also means that Josh owes Dan because he will enjoy the benefit of the interest payments on Dan’s bonds.

The RBA has paid a dividend to the Federal government every year since 1997, every year except during the Global Financial Crisis (can’t find data before 1997). Total paid in dividends is $41.6b, including the $2.7b dividend it paid Josh last month.

So when Josh’s Coalition mates warn Australia might turn out like Venezuela – printing money and causing rampant inflation – they are talking nonsense.

The next big issue to mature? The $3.7b in Commonwealth bonds which matures on December 21.


Michael West established Michael West Media in 2016 to focus on journalism of high public interest, particularly the rising power of corporations over democracy. West was formerly a journalist and editor with Fairfax newspapers, a columnist for News Corp and even, once, a stockbroker.

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