But because of the provisions of its Act it has been required to pay the Commonwealth a dividend of $1.085 billion.
The Act requires it to pay a dividend broadly in line with its net interest earnings, which did well in the last financial year because of the increasing volume of funds given to it to invest and because of higher global interest rates.
But those gains were more than outweighed by a collapse in the Australian dollar value of its investments as the Aussie dollar climbed.
“The exchange rate appreciated by 12 per cent in weighted-average terms against the currencies in which Australia's international reserves are invested,” the Bank said yesterday in its annual report...
While higher dollar meant that Australian dollars could buy more overseas, it also meant that Australian money already invested overseas would be worth less in Australian dollars when it was bought back.
The Bank’s “net unrealised valuation loss” over the year amounted to $2.475 billion.
Most of the loss would not be reflected in a lower dividend payment because it was “unrealised”. It wouldn’t actually take place until the Bank brought some of the money it had invested overseas back onshore, by which time the Aussie dollar might have changed in value again.
The Bank could only deduct “realised” losses from the dividend payment it made to the government.
The Governor Glenn Stevens defended the rules saying they had “proven over the years to be a very sound basis” for determining dividends.
He said foreign exchange losses were inevitable whenever the dollar rose.
“This is not the first such loss - the Reserve Bank last experienced one in 1993/94 - and it is unlikely to be the last," he said.
“The reason is that there is very little scope for a central bank to manage foreign currency risk without compromising its policy obligations.”
“Foreign assets cannot be hedged back to Australian dollars because that would defeat the purpose of holding them. This risk has to be accepted as part and parcel of being a central bank.”
The Bank also revealed that it had taken no action to slow the dollar’s rise. During 2006/07 the Aussie climbed to an 18-year high against the US dollar and a 22-year high against the trade weighted average of currencies.
Governor Stevens said he viewed the rise as “broadly consistent with developments in the Australian economy, particularly the continued increase in Australia’s terms of trade to its highest level in over five decades”.
The Bank had not intervened in the currency market since 2001.
The Bank’s assets under management soared 25 per cent in
2006/07, largely as a result of continuing Commonwealth budget surpluses.
The governor said that when the Future Fund became fully operational in the next year or so he expected the Bank’s assets under management to shrink.
