Global banking giant UBS says the Reserve Bank may be printing money to keep the Australian dollar under control.
UBS analysts Gareth Berry and Andrew Lilley say the evidence that the RBA may have been printing Australian dollars is compelling, but not yet conclusive.
The main evidence the analysts cite to support their theory is a rise in the Reserve Bank’s foreign currency reserves at the same time as the deposits of foreign institutions lurched upwards by a similar amount.
“It is as though freshly-minted Australian dollars are being sold directly to foreign central banks and the proceeds added to the RBA’s pool of FX [foreign exchange] reserves,” they wrote in an analysis.
The UBS analysts say if the Reserve is printing money to satisfy increasing demand for Australian dollars from foreign central banks then it should put downward pressure on the domestic currency.
However, they say the Australian dollar is unlikely to fall sharply, with their forecasts centring on the local currency falling back to parity in three months’ time.
If true, the moves to print dollars to satisfy foreign demand would fit with a recommendation by recent former Reserve Bank board member economist Warwick McKibbin.
In an article in early August Professor McKibbin suggested that money printing would be a more effective and less risky way to lower the Australian dollar than further interest rate cuts.
The UBS analysts say it is only days later that the Reserve Bank’s balance sheet started to behave as if his proposal was adopted.
“Days later the RBA’s balance sheet suddenly started to behave as though the proposal had actually been implemented,” they wrote.
“There are other possible interpretations of the recent balance sheet dynamics too, but this one elegantly fits all the facts.”
The Reserve Bank has over recent months repeatedly stated its concern that the Australian dollar has remained firmly above parity with the greenback, despite a steep slide in Australia’s terms of trade over the past few months.