December 2019

Australian Economy The spines of some old books on a shelf.
Photo: Reserve Bank of Australia

Being Unreserved: About the Reserve Bank Archives

Virginia MacDonald and Jacqui Dwyer

The Reserve Bank of Australia has a unique and rich archives. In addition to records about the nation’s central bank, the archives contain records about Australia’s economic, financial and social history over almost two centuries. The extent of the collection reflects the Bank’s lineage, with its predecessor (the original Commonwealth Bank of Australia) having absorbed banks with a colonial history. Consequently, the Bank’s archival collection spans convict banking records through to information about contemporary episodes in Australia’s history. This article explains why the archives exist, how they are managed and plans to make them more accessible to the public.

Global Economy A map of the world.
Photo: John M Lund Photography Inc – Getty Images

How Do Global Financial Conditions Affect Australia?

David Jacobs

Australia is closely integrated with global capital markets. This integration has been of benefit to the economy, but also means that Australian financial conditions are influenced by developments abroad. The flexible exchange rate regime partially insulates the economy from global financial conditions. In particular, that flexibility means that monetary policy in Australia does not need to move in lock step with policies of the major central banks. However, to meet its objectives for employment and growth, the Reserve Bank can choose to offset pressure on the exchange rate from shifts in foreign monetary policies. Indeed, for much of the past decade or so, forces underpinning the structural decline in global risk-free rates have placed downward pressure on interest rates offshore and in Australia. International investors’ willingness to take risk also has an important bearing on domestic financial conditions.

financial stability, capital, markets, monetary policy
Payments Rolled-up banknotes, coins and desktop calculator are sitting on a desk.
Photo: Parinda Yatha – Getty Images

A Cost-benefit Analysis of Polymer Banknotes

Max Wakefield, Luc Delaney and Richard Finlay

Australia was the first country to issue a full series of polymer banknotes, completed over 1992–96. After 25 years, issuance of the second generation of polymer banknotes is well advanced. It seems appropriate, therefore, to revisit the financial savings resulting from the switch to polymer. Employing a cost-benefit analysis framework, we find that the switch to polymer has resulted in net savings of close to $1 billion over the past 25 years in inflation-adjusted terms. This does not take account of the benefits of reduced counterfeiting, which have also been substantial and were the original motivation for switching to polymer. We also discuss cost savings arising from outsourcing banknote distribution to the private sector, as well as seigniorage income which accrues from banknotes on issue and which ultimately flows to the Australian Government as non-tax revenue in the form of the dividend payment from the Reserve Bank.

banknotes, counterfeit, security features, modelling
Global Economy The illuminated evening skyline of Hong Kong with rice fields in the foreground.
Photo: Photographer is my life – Getty Images

Long-term Growth in China

Ivan Roberts and Brendan Russell

Slowing trend growth in China, and the risks around this trajectory, are relevant to the future economic prospects of its major trading partners, including Australia. This article provides a long-term perspective on growth in China, beginning with a review of historical trends. It then examines the drivers of growth since reforms were introduced in the late 1970s and how these drivers are affecting the growth outlook. The article concludes that a range of structural headwinds will constrain growth in the coming decade, posing challenges for policymakers.

china, trade
Global Economy An early evening view of a Japanese city with Mount Fuji in the background.
Photo: yongyuan – Getty Images

Potential Growth in Advanced Economies

Ivailo Arsov and Benjamin Watson

Potential growth is the rate of growth that an economy can sustain over the medium term without generating excess inflation. Potential growth has declined in the advanced economies in recent decades due to lower growth in the labour force, capital stock and productivity. Current projections and long-term growth expectations suggest that the low rates of potential growth in advanced economies will persist for some time.

international, forecasting, labour market
Financial Stability Banknotes of many countries overlay and form a kind of carpet.
Photo: jayk7 – Getty Images

The Nature of Australian Banks' Offshore Funding

Kellie Bellrose and David Norman

Australian banks access large and deep foreign funding markets to supplement their domestic funding. Looking at the major banks’ worldwide operations, such offshore funding accounts for about one-third of their assets. This funding is raised in a variety of ways, across several countries and by various entities within the banking groups. While offshore funding can create vulnerabilities, these are appropriately mitigated by various factors. It would nonetheless be desirable for banks to continue to lengthen the maturity of their offshore debt securities.

funding composition, banking, bonds
Global Economy An A-shaped illumniated building dominates the skyline of a city at night.
Photo: ispyfriend – Getty Images

Conditions in China's Corporate Sector

Joel Bowman

Revenue and profit growth have slowed in China’s corporate sector in recent years, alongside a broader moderation in China’s economic momentum. The slowdown has been most severe for labour-intensive private companies, particularly export-oriented manufacturing firms. The government has responded by announcing a range of measures aimed at easing financial conditions faced by the private sector. Earlier efforts by the Chinese authorities to reduce risks in China’s financial system appear to have been successful in stabilising leverage in the state-owned sector, but the financial position of private sector firms is more fragile, and risks remain elevated in the real estate industry.

china, business
Finance Financial numbers flash on an outside display with pedestrians and traffic going past.
Photo: Nikada – Getty Images

Developments in Foreign Exchange and Over-the-counter Derivatives Markets

Julie Guo, Dushan Ranasinghe and Zhan Zhang

Global activity in foreign exchange (FX) and over-the-counter (OTC) derivatives markets increased over the three years to April 2019. Continuing a trend observed over prior years, growth in turnover of foreign exchange derivatives outpaced growth in spot market activity. Trading between dealers and other financial institutions accounted for a larger share of market activity than trading between FX dealers.
The Australian dollar remained the fifth most traded currency globally, although the volume of FX trading activity in the Australian market was little changed. Over the past three years, the growth of global and Australian OTC derivatives markets has been driven by interest rate derivatives.

forex, markets, derivatives

September 2019

Finance A pen and calculator lie on top of a financial newspaper
Photo: Daniel Grill – Getty Images

The Committed Liquidity Facility

Michelle Bergmann, Ellis Connolly and Joseph Muscatello

The Reserve Bank provides the Committed Liquidity Facility (CLF) as part of global reforms to improve the resilience of the banking system. The CLF is required due to the low level of government debt in Australia. This limits the amount of high-quality liquid assets that financial institutions can reasonably hold as a buffer against periods of stress. Under the CLF, the Reserve Bank commits to providing a set amount of liquidity to institutions, subject to them satisfying several conditions. These include having paid a fee on the committed amount. No financial institution has needed to draw upon the CLF in response to a period of financial stress.

banking, market operations
Payments Five dollar note with three tips on how to determine it is a fake banknote.
Photo: The Sunday Telegraph

A Brief History of Currency Counterfeiting

Richard Finlay and Anny Francis

The crime of counterfeiting is as old as money itself, and can be targeted at both low- and high-value denominations. In most cases, counterfeiting is motivated by personal gain but, at times, it has also been used as a political weapon to destabilise rival countries. This article gives a brief history of counterfeiting, with a particular focus on Australia, highlighting selected incidents through time and the policy responses to them. For source material on Australia, we draw on Reserve Bank archives dating back to the early 1900s.

banknotes, counterfeit, security features, law enforcement
Australian Economy The outlines of two miners and an excavator against a sun setting.
Photo: shotbydave – Getty Images

Education Choices and Labour Supply During the Mining Boom

James Bishop

The mining boom led to large increases in wages for many lower-skilled jobs in mining regions. This raised the opportunity cost of remaining in school, TAFE or university for many students, particularly those in mining areas. I show that this led fewer people in those areas to pursue tertiary study. These educational responses were an important source of labour market adjustment during the boom. It accommodated most of the strong rise in the labour force participation rate of 15–24 year olds in the resource-rich states, and 5–10 per cent of the total additional labour supply needed in those states.

mining, educators and students, labour market, resources sector
Global Economy A large loaded mining truck drives through a featureless landscape.
Photo: CUHRIG – Getty Images

The Changing Global Market for Australian Coal

Michelle Cunningham, Luke van Uffelen and Mark Chambers

Coal is one of Australia’s largest exports, and has accounted for around one-quarter of Australia’s resource exports by value over the past decade. However, demand in the global market for coal has been evolving in recent years, which is creating some uncertainties for the longer-term outlook for coal exports. Looking forward, demand will be shaped by the speed of the transition towards renewable energy sources, changing steel production technologies, and the pace of global economic growth. Over the next few years, Australian coal production and exports are expected to grow fairly modestly.

mining, trade, resources sector
Global Economy Colourful graphs overlay the illuminated night skyline of Shanghai.
Photo: Somyot Techapuwapat / EyeEm and Xia Yuan – Getty Images

Liberalisation of China's Portfolio Flows and the Renminbi

Bobby Lien and David Sunner

China’s equity and bond markets have grown rapidly to be among the largest in the world, yet, until recently, participation by foreign investors has been limited. Over recent decades, the Chinese authorities have relaxed investment restrictions to allow greater foreign access to these capital markets. This has enabled greater foreign investment and for global equity and bond index providers to increase the weight of Chinese securities in their indices, which are tracked by a range of global investment funds. These developments have contributed to an increase in gross foreign capital flows into China and they are likely to continue to support inflows in the period ahead. At the same time, an increase in Chinese resident portfolio outflows is also likely as domestic investors seek to diversify by investing abroad. The opening of China’s financial markets entails benefits associated with deeper global financial integration, but may also contribute to greater variability in the renminbi.

china, markets, investment
Finance Composite of a monitor showing an array of numbers and a person's thumb tapping on a tablet.
Photo: Chuanchai Pundej / EyeEm – Getty Images

Bank Balance Sheet Constraints and Money Market Divergence

Belinda Cheung and Sebastien Printant

The spread between key Australian money market interest rates has widened and become more volatile in recent years. While this might seem to imply scope to profit from arbitrage – by borrowing at a low rate to invest at a higher one – banks have additional balance sheet considerations that need to be taken into account. We find that money market trades have generally not been profitable for the four major banks since the financial crisis. This is partly because debt funding costs have fallen by less than money market returns. In addition, equity funding, which is more expensive than debt, has increased. Consequently, the incentive for banks to arbitrage between money market interest rates has fallen. We also note that banks tend to prefer more profitable lines of business, such as lending for residential housing, over the narrow margins implied by money market arbitrage.

banking, markets, interest rates, funding composition, mortgages
Payments A digital butterfly emerges from a liquid.
Photo: BlackJack3D – Getty Images

Survival Analysis and the Life of Australian Banknotes

Shane Aves

The Reserve Bank is in the process of replacing Australia’s first full series of polymer banknotes – the ‘New Note Series’ – with the upgraded ‘Next Generation Banknote’ series. This presents a good opportunity to review our experience with polymer banknotes, and in particular, examine how they have worn in practice. To do so, I extend an existing survival modelling approach to estimate how long a given polymer banknote from the ‘New Note Series’ might be expected to last when in use by the general public. I find that $5 and $10 banknotes have tended to last for around 5 years on average, while $20 and $50 banknotes have lasted for 10 and 15 years on average, respectively. I have not modelled $100 banknotes as they are overwhelmingly used for store-of-value purposes and so do not tend to wear out.

banknotes, modelling

June 2019

Australian Economy Two IT experts look at a set of monitors displaying data
Photo: Tetra Images – Getty Images

The Framework for Monetary Policy Implementation in Australia

Domestic Markets Department

The Reserve Bank of Australia's domestic market operations are designed to ensure that the cash rate is consistent with the target set by the Reserve Bank Board. The most important tools to guide the cash rate to the target are the interest rate corridor and daily transactions to manage liquidity in the interbank overnight cash market. The RBA also ensures that there is sufficient liquidity in the cash market for it to function smoothly. This article provides an overview of the RBA's operational framework for implementing monetary policy.

monetary policy, cash rate, market operations
Payments The hands of a woman holding a purse and a credit card
Photo: Astrakan Images – Getty Images

Cash Withdrawal Symptoms

Luc Delaney, Aidan O'Hara and Richard Finlay

Most Australians don't have to travel more than a few kilometres to deposit or withdraw cash. Cash use is declining, however, and with it the number of ATMs and other cash access points. This trend seems likely to continue. While it will probably have relatively little impact on those living in metropolitan areas, it is important that reasonable access to cash services is maintained for people in regional or remote locations as long as such access is needed.

banknotes, currency, banking, atm
Payments A young woman looks out across the water towards an illuminated city skyline.
Photo: SammyVision – Getty Images

Bank Fees in Australia

Susan Black, Dmitry Titkov and Lydia Wang

The Reserve Bank has conducted a survey on bank fees each year since 1997. Banks' overall income from fees was little changed in 2018. The removal of ATM withdrawal fees by a number of banks reduced total fees charged to households. However, this was largely offset by the continued increase in fee income from small businesses, reflecting strong growth in credit card and debit card transactions.

atm, banking, fees
Financial Stability A puzzle showing flags of the G20 countries
Photo: KTSDesign/Science Photo Library – Getty Images

A Decade of Post-crisis G20 Financial Sector Reforms

Mustafa Yuksel

The global financial crisis resulted in significant disruption to markets, financial systems and economies. It also led to comprehensive reform of the financial sector by the G20 group of countries. After a decade of policy design and implementation, standards in the global financial system and regulatory approaches in many countries have changed substantially to improve financial system resilience. Australia, as a G20 member, has been active in implementing these reforms. This article looks at the main financial sector reforms developed in the immediate post-crisis period, their implementation in Australia and the more recent shift in international bodies' focus to assessing whether these reforms have met their intended objectives.

financial stability, reforms
Australian Economy Workers during peak hour are crowding a pedestrian zone
Photo: Alex Segre – Getty Images

Wages Growth by Pay-setting Method

James Bishop and Natasha Cassidy

Using job-level micro data, we show that the dynamics of wages growth differ across pay-setting methods. In recent years, wages growth has been strongest for award-reliant workers, stable at low levels for those on enterprise bargaining agreements (EBAs), and low but rising for those on individual arrangements. These trends reflect differences in the arrangements governing each pay-setting method, and differences in the types of workers covered by them. For instance, individual agreements react most flexibly to changes in labour market spare capacity, while government policies have kept public sector wages growth in EBAs relatively unchanged of late. This new disaggregation of wages growth allows for an estimation of the pass-through of award wage increases to other wage outcomes in the economy. We also find that the new breakdown provides a useful framework for forecasting aggregate wages growth.

wages, payments, employment
Global Economy Early morning mood at a maritime container loading facility
Photo: Yaorusheng – Getty Images

Spillovers to Australia from the Chinese Economy

Rochelle Guttmann, Kate Hickie, Peter Rickards and Ivan Roberts

China is Australia's largest trading partner. The strong links between the two economies raises the question of how a sizeable slowdown in Chinese activity would affect Australia. Through our research we have attempted to quantify how such a scenario could play out and its implications. We consider the main transmission channels, notably trade and financial market effects, and describe possible scenarios that could lead to a material slowing in China. We apply a stylised shock encapsulating features of these scenarios to a medium-sized macroeconometric model of the Australian economy and analyse how the shock is transmitted through real and financial channels. The potential for the exchange rate and monetary policy to offset some of those effects is also examined.

china, modelling, trade
Australian Economy The hands of a cashier retrieve banknotes from a till
Photo: Tom Werner – Getty Images

Competition and Profit Margins in the Retail Trade Sector

Matthew Carter

Net profit margins have declined for both food and non-food retailers over recent years. This has been driven by a decline in gross margins suggesting a reduction in firms' pricing power. This is consistent with information from the Reserve Bank's business liaison program about heightened competition in the retail trade sector. Liaison indicates that firms are seeking to offset the decline in margins through measures such as vertically integrating supply chains and adjusting product mixes. Retailers also report a push to reduce operating expenses such as rent and labour, though with mixed success.

retail, business, trade
Australian Economy Two construction cranes dominate the sky next to a mobile tower
Photo: Andrew Mckenna / EyeEm – Getty Images

Can Structural Change Account for the Low Level of Non-mining Investment?

Jonathan Hambur and Keaton Jenner

No, it cannot. Non-mining firms have invested less over the past decade, relative to their output, than they did over the previous two decades, and this decline in investment intensity has been broad based across firms. This reduced investment could contribute to slower economic growth, if, for example, it is associated with decreased adoption of new technologies. This article looks into potential driving forces behind the decline in the rate of investment, finding that it cannot be explained by shifts in industry structure, or the composition of firms by age or date of formation. The size of the decline is consistent with what would be expected given slower technological progress and lower depreciation rates. But there might be other, more cyclical reasons for the observed slowdown in non-mining investment.

business services, investment, non-mining
Australian Economy Three employees work on large charts stuck to a transparent wall
Photo: Martin Barraud – Getty Images

Explaining Low Inflation Using Models

Natasha Cassidy, Ewan Rankin, Mike Read and Claudia Seibold

The Reserve Bank's inflation forecast models can help assess which factors have contributed most to low inflation over recent years. The models find that spare capacity in the economy and the associated low wages growth can account for much of recent low inflation outcomes. This article outlines the inflation forecast models used at the Bank, and looks at the recent performance of the Bank's inflation forecasts.

modelling, inflation, labour market, wages, forecasting
Finance Old sandstone buildings stand out against glass skyscrapbers in the background
Photo: Karin de Mamiel – Getty Images

The Australian Equity Market over the Past Century

Thomas Mathews

This article describes developments in the Australian equity market over the past century, drawing in part from a newly compiled historical dataset which begins in 1917. Over the past one hundred years, the market has increased in size relative to the economy, while its composition by industry also changed substantially. The data also provide new evidence that historical returns on Australian equities – and therefore the equity risk premium – are lower than previously thought.

finance, markets, financial instruments
Global Economy The illumniated skyline of a metropolitan city merges with digital displays showing charts and numbers
Photo: owngarden – Getty Images

China's Local Government Bond Market

Alex Holmes and David Lancaster

China's local government bond market is a key source of financing for local governments, particularly to fund infrastructure investment. The market has grown rapidly in recent years but is still relatively illiquid and has a narrow investor base. It also shows little difference in pricing of credit risk across different bond types and issuers, partly due to the perception that local governments enjoy an implicit guarantee from the central authorities. The Chinese Government has implemented measures to foster the development of these features of the market, bearing in mind risks to financial stability.

china, bonds, financial instruments
Payments The symbol of Bitcoin is juxtaposed to an electronic circuit board
Photo: KTSDesign/Science Photo Library – Getty Images

Cryptocurrency: Ten Years On

Cameron Dark, David Emery, June Ma and Clare Noone

Ten years on from the creation of Bitcoin, the term ‘cryptocurrency' has entered the public consciousness. Despite achieving some name recognition, cryptocurrencies are not widely used for payments. This article examines why Bitcoin is unlikely to become a ubiquitous payment method in Australia, and summarises how subsequent cryptocurrencies have sought to address some of the shortcomings of Bitcoin – such as its volatility and scalability problems. It also examines the proliferation of new ‘coins' and concludes that, despite the developments in cryptocurrencies, none are currently functioning as money in the economy.

cryptocurrency, currency, money, payments
Australian Economy A long mining train snakes its way through dry country
Photo: Gangliu Maogg Tatomm – Getty Images

Exploring the Supply and Demand Drivers of Commodity Prices

Michelle Cunningham and Emma Smith

Quantifying the relative importance of supply and demand in price movements of commodities can help inform how changes in these prices might impact the Australian economy, via exports, business investment and the exchange rate. Isolating the extent to which a change in commodity prices is driven by demand also provides a timely indicator of global economic activity. In this article, we use a dynamic factor model to help interpret changes in commodity prices as being driven by supply and/or demand developments. Results from the model are consistent with prior understanding of several notable episodes of commodity prices movements.

commodities, prices, modelling

March 2019

Payments A man pays cashless by holding his phone over a scanner.
Photo: zoranm – Getty Images

New Payments Insights from the Updated Retail Payments Statistics Collection

Stephen Mitchell and Hao Wang

The Reserve Bank has significantly expanded the retail payments data that it publishes from 61 to around 300 series. This followed a project conducted in consultation with the industry to update the underlying statistical collection. The new data provide additional insights into Australians' payment behaviours, particularly in the context of the shift towards electronic methods of payment away from cash and cheques. This article discusses some of the new series being published by the Bank.

payments, statistics, npp, rba survey
Finance Stock exchange numbers on a computer screen are overlaid with the silhouette of a city.
Photo: Nikada and Aurelien Coulet / EyeEm – Getty Images

Developments in Banks' Funding Costs and Lending Rates

Susan Black and Dmitry Titkov

Banks' funding costs increased a little over 2018, driven by a rise in the cost of wholesale funding linked to money market rates, but with some offset from reductions in the cost of retail deposits. Most lenders passed the increase in funding costs through to their lending rates, including for mortgages. Nevertheless, funding costs and lending rates remain low by historical standards.

funding composition, banking, finance, bonds
Finance Three office workers in front of a transparent computer screen that shows an application dashboard.
Photo: Caiaimage / Robert Daly – Getty Images

Updates to Australia's Financial Aggregates

Joel Bank, Kassim Durrani and Eden Hatzvi

The financial aggregates for Australia are important data compiled by the Reserve Bank that are used by policymakers to assess financial and economic activity of households and companies. From August 2019, the Reserve Bank will publish the financial aggregates using an improved framework based on a better data collection. This will enhance the quality of information available to policymakers and the wider community. This article gives an overview of the main changes.

finance, statistics, credit
Payments Various new Australian banknotes are laid out, with the ten-dollar banknote being prominent.
Photo: Reserve Bank of Australia

Recent Trends in Banknote Counterfeiting

Meika Ball

Law enforcement intervention has shut down several large counterfeiting operations and led to a decline in counterfeiting rates over the past couple of years. At the same time, the increased availability of low-cost, high-quality printing technology has meant that the quality of counterfeits has improved. This article discusses trends in banknote counterfeiting in Australia and the impact of counterfeiting on different stakeholders.

banknotes, counterfeit, security features, law enforcement
Australian Economy Pedestrians crossing a street are superimposed over a crane, skyscrapers and free-standing houses.
Photo: xavierarnau, mihailomilovanovic, Westend61 and tap10 – Getty Images

The Labour and Capital Shares of Income in Australia

Gianni La Cava

In Australia, the share of total income paid to workers in wages and salaries (the ‘labour share’) rose over the 1960s and 1970s but has gradually declined since then. The corollary is that the share of income going to capital owners in profits (the ‘capital share’) has risen. The long-run increase in the capital share largely reflects higher returns accruing to owners of housing (primarily rents imputed to home owners, particularly before the 1990s) and financial institutions (since financial deregulation in the 1980s). Estimates of the capital share of the financial sector are affected by measurement issues, though structural factors, such as a high rate of investment in information technology, have reduced employment and increased capital in the sector.

labour market, capital, wages, housing, profits, finance
Australian Economy A calculator, model of a house and keys are lying on a spreadsheet.
Photo: Witthaya Prasongsin – Getty Images

Wealth and Consumption

Diego May, Gabriela Nodari and Daniel Rees

Do households consume more when their wealth increases? Our research identifies a positive and stable relationship between household wealth and consumption, largely reflecting changes in spending on motor vehicles, durable goods and other discretionary spending. Increases in household wealth supported household spending between 2013 and 2017, when growth in disposable income was weak. Similarly, declines in household wealth typically weigh on consumption. However, a decline in household wealth is less likely to coincide with weaker consumption growth if it occurs at a time when the labour market is strong and household income growth is firm.

wealth, housing, consumption
Australian Economy Two workers inspect a construction site, with a graph superimposed on the image.
Photo: Jessie Casson – Getty Images

Firm-level Insights into Skills Shortages and Wages Growth

Hannah Leal

Despite increased reports of skills shortages from contacts in the RBA's regional and industry liaison program since 2016, national wages growth has picked up only a little and remains subdued. Information collected through the liaison program since the early 2000s suggests Australian firms use a range of practices in addition to, and sometimes before, increasing wages to address skills shortages. In the short run, this may constrain the effect of skills shortages on wages growth.

employment, labour market, skills, wages
Global Economy A woman aboard a plane types on her laptop.
Photo: Lane Oatey – Getty Images

The International Trade in Services

Peter Rickards

Services are becoming increasingly traded globally and technological advances have led to the rise of more modern services such as communications, financial and intellectual property services. While advanced economies continue to account for the bulk of the demand and supply of services traded around the world, the emerging economies' share has been increasing. This article examines the changing global trends and compares them to Australia's experience with services trade, which has been shaped by China's growing demand.

services sector, trade, china
Global Economy A housing construction site with crane silhouettes superimposed on the image.
Photo: A-Digit – Getty Images and Reserve Bank of Australia

Housing Policy and Economic Growth in China

Martin Eftimoski and Kate McLoughlin

Housing investment has contributed significantly to Chinese GDP growth in recent decades and, due to the steel-intensive nature of that investment, has also been an important driver of Australian exports of iron ore and metallurgical coal. Trends in Chinese residential investment have been strongly influenced by government policies. Since 2016, the Chinese Government has tightened policies, particularly towards ‘speculative’ housing purchases, to moderate property price inflation. It has simultaneously implemented targeted, incremental measures to improve longer-term housing supply. Even so, construction activity has weakened and prices have continued to rise rapidly. Maintaining this policy mix towards the sector is likely to prove challenging as downside risks to broader economic conditions mount.

china, housing

December 2018

Payments
Photo: mediaphotos – Getty Images

Payment Surcharges: Economics, Regulation and Enforcement

Cameron Dark, Chay Fisher, Kim McBey and Ed Tellez

The Reserve Bank's new rules on surcharging, which are enforced by the Australian Competition and Consumer Commission (ACCC), allow businesses to recover the cost of accepting different payment methods but prevent them from surcharging excessively. This article discusses the economic reasons for allowing businesses to surcharge, how the rules work to prevent excessive surcharging, the effect of these rules since their introduction, and how the ACCC enforces them.

payments, regulation, banking
Australian Economy
Photo: Thitikorn Suksao – EyeEm – Getty Images

Which Firms Get Credit? Evidence from Firm-level Data

Gabriela Araujo and Jonathan Hambur

To improve our understanding of how lenders assess firms' creditworthiness, this article relates the characteristics of firms to whether their applications for credit were approved. We find evidence to suggest that firms with relatively low profitability, high debt servicing burdens or limited credit histories were less likely to have their applications approved than other comparable firms. However, the decision to approve an application for credit also appears to be influenced by a range of other unmeasured factors, which possibly reflects the complexity of the approval process in practice.

debt, data analytics
Finance
Photo: wx-bradwang – Getty Images

Understanding Exchange Rates and Why They Are Important

Adam Hamilton

Exchange rates are important to Australia's economy because they affect trade and financial flows between Australia and other countries. They also affect how the Reserve Bank conducts monetary policy. This article outlines how exchange rates are measured, the different types of exchange rate regimes, the factors that influence the exchange rate and how changes in the exchange rate affect the economy.

currency, markets, forex
Finance
Photos: neoellis, da-kuk – Getty Images

The Reserve Bank's Securitisation Dataset

Kate Fernandes and Dominic Jones

The Reserve Bank's Securitisation Dataset contains timely and detailed data on each and every one of the mortgages underlying Australian residential mortgage-backed securities (RMBS). This dataset allows the Bank to better analyse the structure of, and monitor developments in, the mortgage market. In order to examine how representative the dataset is of the wider mortgage market we compare the dataset to less frequent but more comprehensive data from the Australian Prudential Regulation Authority (APRA). We find that the Securitisation Dataset provides excellent coverage of the collateral underpinning the RMBS market, and is representative of the wider Australian mortgage market across a number of dimensions. We then use these data to explore trends in mortgage interest rates.

securitisation, markets, data analytics
Global Economy
Photo: xia yuan – Getty Images

China's Supply-side Structural Reform

John Boulter

Supply side structural reform is a key component of China's economic policy agenda. The motivation for reform is the view that the supply side of China's economy is out of balance with the demand side and requires adjustment. The reform targets the structure of production, to make it more efficient at the macro and firm level. As well as improving efficiency, firms are being pushed to make production more environmentally friendly. Promoting advanced industries and innovation in existing industries are also key features of the policy.

china
Payments
Photo: RBA

Understanding Demand for Australia's Banknotes

Max Wakefield and Richard Finlay

As the sole issuer of the nation's banknotes, the Reserve Bank knows how many banknotes it prints, issues to the public and destroys. However, much less is known about how these banknotes are used. This is particularly true for the $50 and $100 banknotes, which, by value, account for more than 90 per cent of banknotes on issue. To help address this, we describe in this article the various components of Australian cash demand and use a range of techniques to estimate how much each category contributes to total demand. Our key findings include that non-transactional demand for cash (e.g. hoarding for store-of-value purposes) has likely been the driving force of recent growth in the value of outstanding banknotes, and that a small but non-trivial portion of cash demand comes from the shadow economy.

banknotes, money
Global Economy
Photo: Nikada – Getty Images

Developments in Emerging South-East Asia

Max Alston, Ivailo Arsov, Matthew Bunny and Peter Rickards

A number of economies in South-East Asia have been making significant progress in their economic development. This article focuses on the largest middle-income economies in South-East Asia: Indonesia, Malaysia, Thailand, the Philippines and Vietnam. We examine the developments in these economies over recent decades, explore their relationship with Australia and the global economy and consider their potential to reach a significantly higher level of income. These economies have benefited from favourable demographics over recent decades although some will face pressures from ageing populations. However, there are ample opportunities to gain from further improvement in infrastructure, education and labour force participation.

emerging markets
Australian Economy
Photo: Zoonar RF – Getty Images

Business Concentration and Mark-ups in the Retail Trade Sector

Jonathan Hambur and Gianni La Cava

The share of industry sales accounted for by the largest Australian businesses (or ‘business concentration’) has gradually risen since the start of this century. This increase in concentration has been mainly driven by the retail trade sector, particularly in recent years. In contrast, estimates of the ratio of retail prices to marginal cost (or ‘mark-ups’) rose over the 2000s but have declined in recent years. Taken together, the evidence suggests that the retail trade sector has become more competitive in recent times, following a period of declining competition through the 2000s.

retail
Finance
Photo: Imagevixen – Getty Images

A Forward-looking Model of the Australian Dollar

Blair Chapman, Jarkko Jääskelä and Emma Smith

The exchange rate is an important mechanism that helps the economy adjust to external shocks.This article analyses the key determinants of the Australian dollar – the terms of trade and differences between interest rates in Australia and other advanced economies. It emphasises that ‘forward-looking’ measures of these determinants are important for capturing movements of the observed real exchange rate. In particular, they capture longer-term movements in the real exchange rate, including around key turning points, for instance during the global financial crisis.

modelling, currency, forex, data analytics

September 2018

Payments
Photo: Monsitj

The New Payments Platform and Fast Settlement Service

Alexandra Rush and Riaan Louw

A significant advance in the Australian payments system occurred in February 2018 with the public launch of the New Payments Platform (NPP). The NPP enables customers of financial institutions to make immediate payments 24 hours a day, every day of the week (‘24/7’). In conjunction with the development of the NPP, the Reserve Bank developed new infrastructure, the Fast Settlement Service (FSS), which provides for settlement of NPP transactions between financial institutions on a 24/7 basis across their Exchange Settlement Accounts (ESAs) at the Reserve Bank. These new systems have brought fast payment services to Australians in line with similar initiatives that have been undertaken or are underway internationally. The initial adoption of the NPP has been gradual, reflecting the staged introduction of services by financial institutions, as well as the time taken for customers to assess and adjust to the new services being offered.

npp, payments, technology
Australian Economy
Photo: Hero Images

Access to Small Business Finance

Ellis Connolly and Joel Bank

The Reserve Bank has conducted additional outreach this year to hear a broad range of perspectives on small business finance. Many small businesses looking to grow still find it challenging to access finance, particularly without providing real estate as security. Lenders highlight that they are keen to lend to small businesses, but that unsecured finance involves more risk. This article considers these issues and outlines some initiatives market participants have suggested that could help to improve access to finance for small businesses.

business, credit, start-ups
Australian Economy
Photo: Kasto80

Does It Pay to Study Economics?

James Bishop and Rochelle Guttmann

Economics graduates work in a broad range of occupations and industries, often beyond the discipline of economics itself. The earnings of economics graduates are higher than in most other fields of study, including business studies. By estimating wage premiums for various skills, we assert that the comparatively strong earnings of economics graduates comes from the development of analytical thinking and quantitative skills which are highly rewarded in the labour market.

wages, educators and students
Australian Economy
Photo: Sarote Pruksachat

The Effect of Minimum Wage Increases on Wages, Hours Worked and Job Loss

James Bishop

Australia has a detailed system of ‘awards’ that specify different minimum wages depending on the industry, location and skill of an employee. I find that legislated adjustments to award wages in Australia between 1998 and 2008 were almost fully passed on to wages in award-reliant jobs. There is no evidence that modest, incremental increases in award wages had an adverse effect on hours worked or the job destruction rate.

wages, employment
Finance
Photo: Image Source

Money in the Australian Economy

Emma Doherty, Ben Jackman and Emily Perry

Money forms part of our everyday lives and is integral to the smooth functioning of the financial system and the real economy; however, discussions of what money is and how it is created are generally left to economics textbooks. This article provides an introduction to the concept of money and describes how it is created and measured. We also discuss what these measures can tell us about economic activity.

credit, banknotes, money
Australian Economy
Photo: Ipopba

Firm-level Insights into IT Use

Sharon Lai, Emily Poole and Tom Rosewall

Firms in Australia have used advances in information and communication technology (IT) to become more productive, reduce costs, and improve their understanding of customers. The rate at which new technology has been adopted by firms differs greatly, as do the benefits from using IT. The way firms are using IT can help to explain trends in the broader economy. Firms' expenditure on computer software has grown faster than other forms of investment. The adoption of new technology is also changing the composition of jobs in the economy.

technology, business, employment, automation
Australian Economy
Photo: Hinterhaus Productions

The Cyclical Behaviour of Labour Force Participation

Richard Evans, Angus Moore and Daniel Rees

When economic conditions improve, more people enter the labour force. Understanding the nature of this cyclical relationship between participation and economic activity is important for determining the amount of slack in the labour market and predicting how the economy will respond to changes in economic conditions. The participation rates of young people, 25–54-year-old females and older males are the most responsive to changes in economic conditions. If the participation rate did not adjust, expansions would be more inflationary, while recessions would be more disinflationary and lead to larger increases in involuntary unemployment.

wages, employment, inflation
Financial Stability
Photo: Kenishirotie

Financial Stability Risks and Retailing

Gabriela Araujo and Timoth de Atholia

Discretionary goods retailers are facing a challenging environment of increased competition, slow growth in consumer spending and changing consumer preferences. Despite this, these retailers generally appear to be in good financial health and there are many new shopping centres and refurbishments in the pipeline. Banks are active in funding these developments, and are increasing their exposure to retail commercial property, although they are reducing their exposure to retail businesses. If these new developments fail to attract sufficient customer spending, retailers may find themselves unable to pay rent to landlords who have taken on additional debt, and this could lead to losses at banks.

financial stability, retail
Finance
Photo: Nikada

Interest Rate Benchmarks for the Australian Dollar

Serena Alim and Ellis Connolly

Interest rate benchmarks are widely relied upon in global financial markets. They are referenced in contracts for derivatives, loans and securities. They are also used by market participants to value financial instruments, and by investment funds as benchmarks for assessing their performance. The key interest rate benchmarks for the Australian dollar are the bank bill swap rates (BBSW) and the cash rate. This article provides an overview of these benchmarks, and the reforms that have been undertaken over recent years to make them more robust.

financial markets, financial instruments, currency
Global Economy
Photo: Thomas Ruecker

RMB Internationalisation: Where to Next?

Callan Windsor and David Halperin

China's push to make its own currency – the renminbi (RMB) – available for use by non-residents was a catalyst for important reforms. Since the RMB internationalisation policy began in 2009, not only is the RMB now in greater use internationally, capital flows more freely across China's borders, the exchange rate is more flexible and domestic interest rates are more market determined. In time, the RMB could emerge as a widely used regional currency in Asia.

currency, china, financial markets

June 2018

Australian Economy Crane over construction workers at sunny construction site
Photo: Caiaimage/Trevor Adeline – Getty Images

Private Non-mining Investment in Australia

Michelle van der Merwe, Lynne Cockerell, Mark Chambers and Jarkko Jääskelä

While mining investment has risen in importance over recent decades, the non-mining investment share of output has fallen. This article explores some of the factors that have contributed to the downward trend in the non-mining investment share over time. The article finds that the future non-mining investment share could be around 1–2 percentage points lower on average than it was in the two decades before the financial crisis.

Investment, Capex, Manufacturing, Household Services, Business Services, Technology
Australian Economy University graduates, mortar board hats
Photo: PeopleImages – Getty Images

Labour Market Outcomes for Younger People

Zoya Dhillon and Natasha Cassidy

Monitoring developments in the labour market for younger people is important, because they make up a large share of unemployment in the economy, and because early-career labour market outcomes can affect future outcomes. This article outlines the demand and supply factors that have affected 15–24 year old workers in Australia. In particular, we analyse the factors affecting their participation in the labour force, such as increased education attainment. We also show how younger workers are more adversely affected than the rest of the population when economic conditions slow. Over the past decade, increases in the unemployment and underemployment rates for younger people have been over twice as large as for the overall labour market. The share of 20–24 year olds that have become disengaged from either study or work has also increased.

Employment, Wages
Global Economy Young woman wearing blue trousers with an orange suit jacket, in the foreground we can see the back of two people, a man and a woman.
Photo: sturti – Getty Images

Indicators of Labour Market Conditions in Advanced Economies

Alexandra Baker and Meika Ball

While the unemployment rate is the most widely used indicator of labour market slack, there are many other measures. This article reports on what a broad range of indicators say about conditions in the labour markets of advanced economies. We summarise the various indicators using a standard statistical technique. The summary measures show labour markets in most advanced economies are tight, although in some cases not as tight as implied by the unemployment rate. The Australian labour market has spare capacity remaining, consistent with readings from the unemployment rate. The summary measures provide additional information about wage developments for most advanced economies, above and beyond the unemployment rate, but do not fully account for the weak wages growth of recent years.

Employment, wages
Global Economy Mumbai, MH, India
Photo: Puneet Vikram Singh, Nature and Concept photographer – Getty Images

Economic Trends in India

June Ma and Ivan Roberts

The Indian economy has experienced a notable turnaround in recent years. Growth has rebounded, inflation has moderated, and the budget and trade deficits have narrowed. The Indian Government has also initiated policies and reforms aimed at encouraging investment, strengthening productivity and ensuring fiscal sustainability. Stronger growth in domestic demand has led to a recovery in India's imports, including from Australia. The recent volatility in foreign exchange markets and the recovery in oil prices pose upside risks to inflation and the current account deficit. However, India's strong long-term potential for growth, driven by demographics, urbanisation and productivity-enhancing reforms, suggests there is scope for trade between Australia and India to expand further in coming years.

India, trade
Australian Economy Image showing transmission of data.
Photo: spainter_vfx – Getty Images

Banking Fees in Australia

Emily Perry and Christian Maruthiah

The Reserve Bank has conducted a survey on bank fees each year since 1997. The most recent survey suggests that banks' fee income from both households and businesses rose in 2017, due to a combination of growth in the volume of services for which fees are charged and higher unit fees on some products. Deposit fee income continued to decline relative to the value of outstanding deposits, while lending fee income as a share of assets was steady. Greater use of electronic payment methods continued to support strong growth in merchant service fee income

banking, technology, rba survey
Global Economy Image of a map with a hand in the foreground holding Fijian currency
Photo: DNY59, chameleonseye – Getty Images

Developments in Correspondent Banking in the South Pacific

Lindsay Boulton and Brett Winton

This article examines the withdrawal of global financial institutions from providing correspondent banking services to the South Pacific region and the implications for remittances. Disruptions to the flow of remittances, an important source of income to many low-income island nations, could limit local consumption and adversely affect economic stability. So far, however, remittances to the South Pacific region have continued to increase.

Banking, services sector
Global Economy Shanghai Skyline
Photo: Dong Wenjie – Getty Images

Trends in China's Capital Account

Madeleine McCowage

Chinese policymakers' approach to liberalising capital flows has been gradual and controlled over time, as the authorities have sought to mitigate volatility in the Chinese renminbi (RMB) and private capital flows. Direct investment flows out of China have grown, become more diversified and have increasingly been accounted for by private investors. Banking-related flows have proved more volatile and are correlated with expectations for the RMB.

China, investment
Finance An image that represents a network and linkages between players in the OTC derivatives market
Photo: JulieanneBirch, AF-studio – Getty Images

The Australian OTC Derivatives Market: Insights from New Trade Repository Data

Duke Cole and Daniel Ji

Over-the-counter (OTC) derivatives have played a significant role in episodes of financial stress, including the global financial crisis. However, because these derivatives are not traded on exchanges, detailed information about them has not generally been available. Newly available trade-level data coming from trade repositories can now facilitate a closer look at these markets than was possible before. This article focusses on OTC interest rate derivatives. Central counterparties (CCPs) have become much more important, in large part because of G20 reforms to increase the central clearing of OTC derivatives. Nonetheless, Australian banks still have significant exposures to other counterparties, including foreign banks. In aggregate, Australian banks hold a variety of offsetting single-currency interest rate derivatives, and use cross-currency swaps to hedge exchange rate risks.

derivatives, interest rates, financial instruments, regulation, central clearing

March 2018

Australian Economy A photograph of a Martin Place street sign in front of the Reserve Bank Head Office
Photo: Reserve Bank of Australia

Meet MARTIN, the RBA's New Macroeconomic Model

Tom Cusbert and Elizabeth Kendall

The Reserve Bank has begun using a new full-system macroeconomic model called MARTIN in policy analysis and forecasting. It is designed to be used as part of the Bank's existing processes for forecasting and analysis that use a range of information, models and staff assessments. MARTIN is already being used in these processes to help understand economic developments and quantify risks, and in time it will be used to extend forecasts beyond the usual two-to-three-year horizon.

martin, modelling, forecasting
Australian Economy Heavy mining equipment sits among large piles of red earth
Photo: Cuhrig – Getty Images

Mining Investment Beyond the Boom

Keaton Jenner, Aaron Walker, Cathie Close and Trent Saunders

The construction phase of Australia's mining boom is now almost complete. In this article, we use two complementary approaches to investigate what mining investment might look like look over the next decade or so. The first approach explores the long-run determinants of mining investment and its likely long-run share of GDP. We then take a bottom-up approach, focusing on the amount of investment that will be required to maintain firms' existing productive capacity; in this approach we focus on Australia's three major commodities (coal, iron ore and liquefied natural gas). The analysis suggests that mining investment will likely make up a larger share of GDP than it did before the boom, and that it will continue to play an important role in driving movements in Australia's economic activity.

mining, resources sector, investment, capex
Australian Economy A blue ribbon connects a bright light bulb to an array of cogs
Photo: Chao Fann – Getty Images

Structural Change in the Australian Economy

Rachel Adeney

The structure of the Australian economy has changed significantly over the past 50 years. Services have become an increasingly important part of the economy. Supply chains have lengthened as traditional goods-producing industries have become more specialised in their core activities and outsourced their non-core activities to the business services sector. These developments have had significant implications for the composition of employment and the skill requirements of the Australian labour force.

services sector, employment
Australian Economy A woman explains the content of a computer screen to a male colleague
Photo: Scyther5 – Getty Images

Perceptions of Job Security in Australia

James Foster and Rochelle Guttmann

A concern that low job security is constraining wage growth has been expressed in many countries. Using data on Australian households over time, this article finds that workers' perceptions of their own job security have declined in recent years. This deterioration has occurred across many job and personal characteristics. These weaker job security perceptions have provided a small drag on wage growth.

employment, wages, automation
Global Economy An angle grinder cuts through a steel pipe causing sparks to fly
Photo: Csaba Toth – Getty Images

Wage Growth in Advanced Economies

Ivailo Arsov and Richard Evans

Nominal wage growth in advanced economies has been sluggish, despite unemployment in a number of places falling to levels consistent with full employment. This article finds that, in most economies, low wage growth does not reflect a weaker relationship with unemployment. Instead, lower productivity growth, the difficulty of cutting wages following the global financial crisis and a decline in labour's bargaining power help explain some of the wage sluggishness. There also appears to be a common, but yet unidentified, factor that has weighed on wages over the past two years.

employment, wages
Finance Tow high-rise buildings frame the upper portion of the Sydney's Town Hall
Photo: Andreybl – Getty Images

Developments in Banks' Funding Costs and Lending Rates

Tessa McKinnon

This article updates previous Reserve Bank research on the composition and pricing of banks' debt funding and lending rates. The major banks' debt funding costs declined a little over 2017, primarily driven by a decline in the cost of deposits. Over the same period, overall lending rates were little changed, with higher household lending rates partly offset by lower business lending rates.

funding composition, banking, financial instruments, bonds
Australian Economy A highrise building stands out among lower suburb buildings.
Photo: Simon Bradfield – Getty Images

The Distribution of Mortgage Rates

Michelle Bergmann and Michael Tran

Mortgage interest rates can vary considerably across borrowers and are typically less than the standard variable rates (SVRs) advertised by banks. This article uses loan-level data to explore the relationships between interest rates and the characteristics of borrowers and their loans. Mortgages with riskier characteristics tend to have higher interest rates. Discounts applied to SVRs have tended to increase over recent years, and are also influenced by the type of loan and its size.

mortgages, interest rates, securitisation
Global Economy Chinese banknotes cover a table
Photo: Hudiemm – Getty Images

Non-bank Financing in China

Joel Bowman, Mark Hack and Miles Waring

The rise of shadow banking activities over the past decade has provided a range of benefits to the Chinese economy and financial system. Yet, it has also raised considerable financial stability risks, prompting Chinese authorities to announce many changes to the regulatory and supervisory framework. This Bulletin article examines the nature and complexity of shadow banking and highlights the challenges facing the Chinese authorities.

china, shadow banking
Payments Banknotes from England, Canada and Australia are lying on a flat surface
Photo: Gangliu Maogg Tatomm – Getty Images

High-denomination Banknotes in Circulation: A Cross-country Analysis

Gordon Flannigan and Stephanie Parsons

In Australia, Canada and the United Kingdom, the number of high-denomination banknotes in circulation has increased at an above-trend rate in recent years. Evidence suggests that overseas demand might be a common driver of this elevated growth. Increased domestic demand for both transaction and store-of-value purposes may also have contributed, as well as responses to changes in government and central bank policies. This research was undertaken with assistance from members of the Four Nations Distribution Working Group, in line with the group's objective to explore banknote-related topics that are directly relevant to the member central banks.

banknotes

The graphs in the Bulletin were generated using Mathematica.

ISSN 1837-7211 (Online)