June 2023
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Climate Change and Financial Risk
Climate change, and the actions taken in response to it, introduces both risks and opportunities for financial institutions. The Reserve Bank continues to monitor the build-up of climate-related financial stability risks, including how these risks are priced and who ultimately bears the physical and transition risks arising from climate change. Globally and in Australia, most analysis has found limited direct effects of climate risks on the financial system as a whole. Those that do arise fall unevenly, with the largest risks concentrated in specific geographic regions and sectors. Much of the analysis to date has been exploratory in nature and analytical frameworks continue to develop. This reflects, in part, the complexity of bringing together elements of climate science, economics, finance and regulation. Commonly identified areas for improvement relate to data availability and coverage, consistent disclosure requirements, and the design of scenarios used to assess climate-related risks to financial stability. Ongoing engagement and coordination between the public and private sectors, domestically and internationally, will be required to effectively monitor and ultimately manage the physical and transition risks arising from climate change.
New Insights into the Rental Market
This article draws out new insights into the private Australian rental market using a new large administrative dataset of rental properties, which is an input to the Consumer Price Index (CPI). CPI rent inflation has picked up recently. Since 2021, rents have increased across inner-city and regional areas throughout all the states. Rent increases have also become more common and larger on average – particularly for the 2–3 per cent of properties each month that have a change in tenants. This is in contrast with the experience during the COVID-19 pandemic where rents fell in many suburbs close to central business districts but increased in regional areas, driven by a preference shift among many households for more space and net population flows.
Consumer Payment Behaviour in Australia
The results of the Reserve Bank’s 2022 Consumer Payments Survey show that consumers continue to shift from using cash to electronic payment methods – a trend that was accelerated by the COVID-19 pandemic and consumers’ preference towards using debit and credit cards and making payments online. Consumers are also increasingly using more convenient payment methods, particularly contactless card payments, by tapping their card or phone. Cards are now used for most in-person payments, even for small transactions that used to be made mostly with cash.
Cash Use and Attitudes in Australia
The 2022 Consumer Payments Survey reveals that the ongoing decline in cash use in Australia has accelerated since the COVID-19 pandemic. The share of in-person transactions made with cash halved, from 32 per cent to 16 per cent, over the three years to 2022. The decline in cash use was particularly pronounced for smaller payments; cash is now used less than electronic methods for all transaction sizes. The demographic groups that traditionally used cash more frequently for payments – such as the elderly, those on lower incomes and those in regional areas – saw the largest declines in cash use. Privacy and security concerns with electronic payment methods continued to be the main reason for needing cash, while barriers to using electronic payment methods have become less important since 2019.
Estimating the Relative Contributions of Supply and Demand Drivers to Inflation in Australia
Inflation has increased substantially since mid-2021. Understanding the relative contributions of supply and demand factors is important for determining the appropriate monetary policy response; a central bank may at least partly ‘look through’ the price effects of a supply shock if it is expected to be short lived and inflation expectations remain anchored. This article attempts to disentangle and explore the contributions of supply and demand factors to the recent inflationary episode, using three approaches. Similar to the experience of other advanced economies, our estimates suggest that supply-side factors have been the biggest driver of recent inflation outcomes in Australia. These supply-side factors have been persistent, with their contribution to inflation growing over 2022, leading to an extended period of inflation being above target and concerns that inflation expectations could become de-anchored. That said, demand has also played an important role.
Leverage, Liquidity and Non-bank Financial Institutions: Key Lessons from Recent Market Events
Non-bank financial institutions (NBFIs) can pose risks to financial stability due to their size, complexity and global interconnectedness. Vulnerabilities present in some NBFIs include high levels of leverage, liquidity mismatches and weaknesses in risk management practices. This article discusses how these vulnerabilities have been exposed in multiple episodes overseas since early 2020, resulting in dysfunction in some financial markets and losses for some NBFI counterparties. While Australian markets and institutions were largely unaffected by these episodes, regulators in Australia and overseas remain vigilant to the potential future risks posed by the sector.
Syndicated Lending
Syndicated lending involves a group of lenders providing a single loan to one borrower. This article considers the purposes and workings of syndicated loans in the Australian market, and the advantages of this type of lending for both lenders and borrowers. It finds that syndicated loans are a significant source of funding for large Australian businesses and for borrowers with large financing needs, especially as such loans are often more accessible and flexible than public debt markets. For lenders, syndication allows them to diversify their exposures, as well as to monitor loans and negotiate covenants efficiently.
Recent Developments in the Cash Market
Following the implementation of unconventional monetary policy measures during the COVID-19 pandemic, liquidity in the banking system rose significantly. This led to a fall in cash market activity and a decline in the cash rate to below the cash rate target. Despite the high level of liquidity – as measured by Exchange Settlement (ES) balances – some banks have continued to borrow in the cash market. Over the past year or so, this borrowing has picked up somewhat and the cash rate has risen modestly to be slightly closer to the target, largely owing to an increase in the concentration of ES balances. As the Reserve Bank’s unconventional policy measures unwind and ES balances decline, activity in the cash market is likely to increase further. The extent of any future pick-up in activity, and the level of the cash rate relative to the target, will be influenced by the distribution of ES balances across banks.
Economic Developments in the South Pacific
Australia has long played a significant role in the regional economy of the South Pacific. This article provides an overview of economic developments in the region, with a focus on recent shocks and medium-term growth challenges. The region’s heavy reliance on external demand meant that South Pacific economies were severely impacted by the COVID-19 pandemic and other concurrent challenges. Expansionary economic policies implemented by governments and central banks, alongside international aid and lending, supported the region through the acute phase of the pandemic. While a recovery is underway, the South Pacific will continue to face challenges to its medium-term growth and development, particularly via high debt levels and climate change.
Correspondent Banking in the South Pacific
Worldwide, many financial institutions make use of correspondent banking services to connect to the global financial system. This article examines the withdrawal of global financial institutions from the provision of correspondent banking services to the South Pacific and the implications for countries in the region. The available evidence suggests that South Pacific nations, like many small island economies globally, have seen a larger-than-average decline in the provision of these services. The decrease in the availability of correspondent banking services appears to be most pronounced for smaller local banks and in the major global currencies. While the available evidence suggests that South Pacific countries have been able to manage this decline thus far, the remaining correspondent banking services are becoming increasingly stretched and further withdrawal may cause financial sector disruption.
Explainer: Causes of Inflation
This Explainer describes the main causes of changes in the inflation rate, which can be grouped into three broad categories: demand-pull; cost-push; and inflation expectations. These different causes of inflation are considered by the Reserve Bank when it analyses and forecasts inflation.
Some graphs in this publication were generated using Mathematica.
ISSN 1837-7211