April 2024
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Assessing Full Employment in Australia
Full employment is a longstanding objective of monetary policy in Australia, alongside price stability. The Reserve Bank Board aims to achieve the maximum level of employment consistent with low and stable inflation in the medium term. This article explains how RBA staff form an assessment of how labour market conditions stand relative to full employment. RBA staff draw on a range of labour market indicators, model-based estimates and outcomes for wages growth and inflation. Any single indicator tends to provide a partial view of the labour market and the level of each indicator that is consistent with full employment can change over time as the structure of the economy evolves. Ultimately, assessing how close the labour market is to full employment requires careful judgement, which the RBA sets out in its quarterly Statement on Monetary.
Cash Rate Pass-through to Outstanding Mortgage Rates
The interest rate paid by outstanding mortgage borrowers increased by around 320 basis points between May 2022 and December 2023, around 105 basis points less than the cumulative increase in the cash rate over this period. This pass-through from cash rate increases to the average outstanding mortgage rate has been slower than in recent tightening episodes due to a high share of outstanding fixed-rate loans and the effects of heightened mortgage lending competition. The average outstanding mortgage rate will increase further as the remaining share of low-rate fixed-rate loans expire and reprice at higher interest rates. By the end of 2024, overall pass-through is expected to be comparable to earlier tightening episodes.
Bank Funding and the Recent Tightening of Monetary Policy
Banks’ funding costs have risen substantially since early 2022, driven by increases in the cash rate. This article explains how increases in the cash rate passed through to banks’ funding sources and how banks adjusted their funding mix. All non-equity sources of bank funding became more expensive over the hiking phase. Banks increased rates on term deposits by more than at-call deposits. Within at-call deposits, banks increased rates most for those savings accounts with conditions attached. Further, banks’ share of funding from term deposits grew and banks issued more debt as the Term Funding Facility started to mature.
The Effect of Least-cost Routing on Merchant Payment Costs
The RBA supports all merchants being able to choose the card network used to process debit transactions – a functionality known as least-cost routing (LCR) – with the aim of increasing competition and reducing the cost of accepting card payments. This article presents the RBA’s first estimates of the effects of LCR on a merchant’s cost of accepting debit card payments. Using merchant-level data, we estimate that the cost of accepting debit card transactions is nearly 20 per cent lower for merchants that have LCR turned on compared with those with LCR turned off, though the results differ across merchant size and choice of pricing plans. Once LCR for online and mobile wallet payments is widely available and taken up by merchants, the potential cost savings are likely to be even larger.
Financial Stability Risks from Non-bank Financial Intermediation in Australia
Risks to financial stability posed by the non-bank financial intermediation (NBFI) sector in Australia remain relatively contained. In comparison to overseas, the size of the NBFI sector (excluding superannuation) is relatively small, and its interconnectedness with the traditional banking sector has continued to decline. However, as has been shown in recent periods of stress in overseas markets, vulnerabilities in the NBFI sector can have implications for financial stability. In particular, there remains a risk of disorderly movements in some international asset markets, which could be exacerbated by the role of overseas NBFIs and spill over into Australian markets. Lending by Australian non-banks remains small as a share of outstanding credit, but has recently shifted towards riskier market segments and there is less detailed information about this lending than that done by prudentially regulated banks. As part of its monitoring of evolving risks in the NBFI sector, Australia’s Council of Financial Regulators has sought to improve visibility over domestic NBFIs’ activities, including in commercial real estate and the growing use of over-the-counter derivatives. This article provides an analysis of recent developments and evolving risks posed by NBFIs in Australia.
Assessing Physical Climate Risk in Repo-eligible Residential Mortgage-backed Securities
This article assesses physical climate risk in Australian residential mortgage-backed securities (RMBS) using two risk metrics. Based on these metrics, RMBS with higher levels of physical climate risk tend to be issued by small regional banks and credit unions. In addition, RMBS with higher physical climate risk do not appear to have additional credit enhancement. This could suggest that securitisation markets have yet to fully incorporate physical climate risk exposures into their assessments of RMBS, or that current climate risks are perceived to be small. However, the measure of climate risk used in this analysis is subject to several limitations and there is significant uncertainty about the future path and impact of climate change. This analysis is a first attempt at quantifying climate risk present in Australian RMBS and is part of ongoing work at the RBA to assess the effect of climate change on the financial system.
The Private Equity Market in Australia
The Australian private equity market has grown significantly for a number of years, particularly as the economy recovered from pandemic-related disruptions. Consistent with this growth, private equity deals involving Australian companies have increased in value, and private equity funds have raised larger amounts of capital from investors. Recently, however, private equity activity has declined substantially as borrowing costs increased. Over recent years, international private equity firms and investors have also increased their presence in the Australian market. This article discusses these developments in the Australian private equity market and considers the implications that a robust private equity market may have on Australian businesses and public capital markets.
Migration to Public Cloud: Risks and Regulatory Requirements for Clearing and Settlement Facilities
Public cloud technologies are increasingly being adopted by firms in the financial industry, including clearing and settlement facilities (CS facilities). Using public cloud offers a range of opportunities, but also presents risks for a CS facility’s operations. Because CS facilities play a critical role in supporting the smooth functioning of financial markets, they need to manage these risks to ensure that they continue to provide resilient and secure services. This article discusses the opportunities and risks for CS facilities in using public cloud, and outlines the related regulatory requirements that apply to CS facilities in their management of risks, consistent with their obligations to promote efficiency and stability in the financial system.
China’s Monetary Policy Framework and Financial Market Transmission
While it has evolved significantly over the years, China’s monetary policy framework continues to differ in some important respects to those in most advanced economies. In contrast to these economies, the People’s Bank of China makes significant use of quantity-based policy instruments, though interest rates now play a greater role than in the past. This article takes stock of China’s current monetary policy framework and its implementation, and discusses the transmission of price-based monetary policy instruments to market and retail interest rates in the economy. In doing so, this article sheds light on the implementation of monetary policy in the world’s second largest economy.
Urban Residential Construction and Steel Demand in China
Investment in Chinese urban residential real estate has been declining since 2021, and demand for steel by the sector has also slowed considerably. Despite this decline, overall demand for steel in China has been resilient due to strong growth in manufacturing and infrastructure investment, which looks likely to continue in the near term. This article provides a projection for urban residential construction in China to 2050, suggesting that construction in China has peaked and that demand for steel will decline in the longer term. This will weigh on overall steel demand in China, though there remains considerable uncertainty around the longer term outlook for demand from other sources.
Explainer: The Transmission of Monetary Policy
This Explainer describes how changes made by the Reserve Bank to its monetary policy settings flow through to economic activity and inflation. It outlines the stages of monetary policy transmission as well as some of the main channels through which monetary policy affects the Australian economy.
The graphs in the Bulletin were generated using Mathematica.
ISSN 1837-7211 (Online)