The Federal Government has given the Reserve Bank of Australia a $8.8 billion one-off grant to help it manage future economic crises.
The money will be added to a fund used to offset the central bank’s exposure to risky financial assets.
Federal Treasurer Joe Hockey says Australia’s economy continues to grow, but financial instability in the United States presents serious risks for global growth.
He says there is a looming threat of another debt-ceiling stand off in the United States.
“[The] United States has not resolved its structural issues,” he said.
“They’ve kicked the can along the road, closer to the mid-term elections. I don’t see a way forward out of that.
“And we’re not going to allow Australia to become in anyway as vulnerable as the United States and other jurisdictions may be over the month and year ahead.”
RBA Governor Glenn Stevens ‘requested payment’
Mr Hockey says RBA governor Glenn Stevens wrote to him after September’s federal election to request the payment.
“The governor of the Reserve Bank has written to me indicating that the Reserve Bank Board believes that it would be appropriate for the Reserve Bank Reserve Fund to be increased to 15 per cent of the bank’s assets at risk,” he said in a statement.
“Accordingly, the Government injection of $8.8 billion into the Reserve Bank Reserve Fund to meet the 15 per cent target will ensure that the bank is properly resourced.”
The Treasurer says the balance of the fund has been depleted by the high value of the Australian dollar over recent years.
Australian Federal Treasurer Joe Hockey
But Opposition treasury spokesman Chris Bowen says the former Labor government never received a request for such a grant.
He says Mr Hockey must detail the exact nature of Mr Stevens’s request.
“To casually issue a media release for the expenditure of $8.8 billion with the associated impact on the underlying cash balance in 2013-14 is simply not good enough,” Mr Bowen said in a statement.
“By making this grant, Treasurer Hockey has added nearly $9 billion to the deficit.
“To create the perception that the RBA urgently needs $8.8 billion could in fact undermine confidence in the Australian economy.
“The Treasurer must immediately detail: the exact advice from the Reserve Bank of Australia, whether a specific request for the funds was made, how it was initiated, and any related advice from Treasury.”[youtube height=”400″ width=”550″]http://www.youtube.com/watch?v=IZTyhItHo1A[/youtube]
Payment follows increase in debt limit
The payment comes a day after Mr Hockey announced plans to raise the Commonwealth’s debt limit by $200 billion dollars and a six-month audit into Government finances.
The debt increase will take Australia’s borrowing limit to $500 billion.
Mr Hockey says the increase is necessary to avoid the kind of debt crisis seen in the United States in the past few months.
He says the latest Treasury show Australia’s debt could peak at above $400 billion.
Australian dollar vs US dollar since 1984
RBA ‘fully equipped’ for challenges ahead
Mr Hockey says the payment to the RBA will its capacity to conduct monetary policy and foreign exchange operations, while ensuring it is “fully equipped for whatever challenges lie ahead”.
“Australia’s financial system relies on the financial strength of the Reserve Bank and the credibility of its monetary policy and foreign exchange operations,” he said.
“This injection of funds puts beyond any doubt the Reserve Bank’s continued ability to perform its core monetary policy and foreign exchange functions, in an environment of heightened financial market volatility.”
The move comes amid warnings from the RBA about the destabilising affects of the persistently high Australian dollar.
During a speech in Sydney last week, Mr Stevens said the RBA was limited in its capacity to lower the value of the local currency.
The dollar hit a new five-month high of 97.03 US cents today as the US dollar declined, but later fell slightly. It was buying 96.5 US cents around 3.30pm AEST.
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