No dividend as RBA focuses on strengthening capital reserve

The Reserve Bank has notched up its biggest profit in four years, making $4.3 billion in the year to June, thanks to the sharp fall in the Australian dollar.

In its annual report on Thursday, the central bank said a 9 per cent slide in the currency last financial year lifted statutory earnings up from $1.08 billion a year earlier.

The bank holds a large pool of foreign currency reserves, so a weaker exchange rate boosts profits by lifting the Aussie dollar value of these assets.

Despite the higher statutory earnings, however, the less volatile measure of underlying profit was "very low by historical standards" at just $700 million, because of the low level of global interest rates.

The underlying profit measure determines any dividends the bank can pay the government, and this year it will not make a distribution.

It also confirmed that its capital reserve - designed the protect the bank against sudden market moves - held just $2.5 billion, which it said was "well below its target level".

On Wednesday, Treasurer Joe Hockey said the government would inject $8.8 billion into the buffer fund, which will rebuild the fund to much healthier levels while dragging the federal budget into a deficit approaching $40 billion this year.

Governor Glenn Stevens' comments in a foreword to the report urged the government not to take a dividend this year. "The board's view is that the earnings should be devoted in their entirety to rebuilding the Reserve Bank Reserve Fund," he wrote.

Mr Stevens is one of the highest-paid central bankers in the world, earning $1.02 million a year, but the report shows his pay was unchanged in 2012-13. Average salaries across the central bank rose 4 per cent, an increase in line with that of the previous year.

The bank's operational costs rose by more than 8 per cent due to an increase in staff numbers for several projects, including an effort to prevent counterfeiting of Australian bank notes.

During the financial year the Reserve made three 0.25 percentage point cuts in the cash rate in response to a weakening in the mining boom. It made a further cut in August, taking the cash rate to 2.5 per cent, its lowest in decades.

"The Australian economy recorded below-average growth over the year, as the impetus from the extraordinary run-up in investment spending by the resources sector began to abate and as some other sectors remained somewhat subdued," Mr Stevens wrote.

He noted there had been a "noteable" decline in the Australian dollar towards the end of the financial year as investors reassessed the prospects of the Australian and US economies. However, this has recently been partly undone by a rise in the dollar above US96¢.