October 2024
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Do Housing Investors Pass-through Changes in their Interest Costs to Rents?
Interest rates and rents often move together. Some have argued that this positive relationship is evidence that higher interest rates have been a key driver of increases in rents over the past few years, due to leveraged housing investors passing through increases in their interest costs to their tenants. This article uses anonymised tax return data covering 2006/07–2018/19 to estimate the direct pass-through of interest cost changes to housing investors’ rental income. It finds small pass-through on average, even when interest rates are rising. The largest estimate suggests that direct pass-through results in rents increasing by $25 per month when interest payments increase by $850 per month (the median monthly increase in interest payments for leveraged investors between April 2022 and January 2024). Overall, the results are consistent with the view that the level of housing demand relative to the housing stock is the key driver of rents.
Developments in Wages Growth Across Pay-setting Methods
The dynamics of wages growth can differ across pay-setting methods. Understanding these differences is relevant for forecasting wages growth, and for assessing labour market conditions and inflationary pressures. Across each pay-setting method, wages growth picked up following the COVID-19 pandemic, but appears to have peaked. Wages growth is expected to continue to slow as the labour market eases, but the rate of easing is expected to vary across each method. This article explains recent developments in wages growth across pay-setting methods and the RBA’s disaggregated approach to forecasting wages growth, which includes considering the Fair Work Commission’s annual reviews of the minimum wages in modern awards.
Small Business Economic and Financial Conditions
The economic environment has been challenging for many small businesses over the past year. Growth in demand has slowed while input costs remain elevated, putting pressure on profitability – particularly for businesses reliant on discretionary consumer spending. Even so, profit margins remain around pre-pandemic averages for most small businesses. While access to credit remains a challenge for small businesses, many accumulated sizeable cash buffers during the pandemic, contributing to their resilience over the past few years. The unevenness in small business conditions has been reflected in some continuing to perform well, while others have had to draw down on cash buffers and an increasing share have entered insolvency. However, the number of insolvencies remains below its pre-pandemic trend on a cumulative basis. This article discusses small business conditions in Australia by drawing on information from the Reserve Bank’s 32nd Small Business Finance Advisory Panel, firm-level administrative data and other economic surveys.
The Reliability of Retail Payment Services
Australians are increasingly dependent on the continuous availability of electronic payment systems. As such, every incident or outage can potentially cause inconvenience or economic harm for end-users of those systems. This article presents insights into the reliability of payment systems using information from the RBA’s retail payment incidents dataset. The article notes that retail payment services have an average availability of at least 99.8 per cent each quarter. Online banking and fast payments services are most likely to be affected from outages, with root causes relating to issues with third parties, software and change management. Given the wide-reaching impact of outages, the effective management of operational risk in the payments system has never been more important.
Inflation-linked Financial Markets
Financial instruments with returns that are indexed to inflation allow market participants to hedge against or take positions on future inflation. Inflation-linked bond and swap markets in Australia are small and not very liquid relative to some other advanced economies. Nevertheless, pricing in these markets can provide valuable information about participants’ inflation expectations. Market measures of long-term inflation expectations have increased in many advanced economies since the COVID-19 pandemic. In Australia, this has brought expectations into closer alignment with the RBA’s inflation target.
Growth in Global Private Credit
Global private credit has grown rapidly over the past two decades, providing an alternative source of financing for businesses. This article introduces a new estimate of the size of private credit outstanding in Australia, based on data collected by the Australian Prudential Regulation Authority and London Stock Exchange Group. It is estimated that there is around $40 billion in private credit outstanding in Australia, which is around 2½ per cent of total business debt. Globally, the growth in private credit has raised concerns related to a lack of visibility over leverage and interlinkages, with regulators taking steps to strengthen oversight of the market. For Australia, the risks to financial stability appear contained for now, though regulators continue to monitor the sector closely.
Interpreting Chinese Statistics: Extracting Expenditure-side Quarter-on-quarter Growth Contributions
Components for GDP on the expenditure side of the national accounts – expenditure on consumption, investment (including inventories) and exports less imports – can provide an important read on the composition of demand. For China, these components are available in contributions to year-ended GDP growth, which provides insight into trends but makes it difficult to interpret how the economy is operating quarter to quarter. This article discusses a method for deriving contributions to quarter-on-quarter GDP growth using official data that allows for a better understanding of expenditure side drivers of quarter to quarter. The decomposition shows that strong growth in the March quarter of 2024 was driven by a large increase in net exports, but growth in the June quarter was mainly supported by investment, which likely reflected a large contribution from the change in inventories. This suggests that Chinese domestic demand remained sluggish in the first half of the year, despite the strong outcome for GDP growth in the March quarter.
The ABCs of LGFVs: China’s Local Government Financing Vehicles
China’s local government financing vehicles (LGFVs) are a key feature – and risk – of China’s infrastructure investment and financing environment. The scale of their debt has consequences for local governments’ fiscal sustainability and for capacity to continue financing infrastructure development. This article reviews progress and challenges in the transformation of LGFVs from local government off-balance sheet financing vehicles into market-driven entities, and estimates the scale and sustainability of their debt burdens at a regional level. Developments in the debt sustainability and investment outlook at China’s LGFVs potentially has implications outside of China due to the importance of LGFVs to financial stability and long-run growth in China.
July 2024
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Assessing Potential Output and the Output Gap in Australia
The output gap – the difference between actual output and potential output – is an important consideration for monetary policy as it is a measure of the extent of spare capacity in the economy. This article explains how RBA staff form an assessment of potential output and the output gap. We draw on a range of model-based estimates, capacity utilisation indicators and activity measures. Model-based estimates give a quantitative assessment of the level of spare capacity in the economy, but there is considerable uncertainty modelling unobserved concepts like potential output and the output gap. Ultimately, assessing spare capacity in the economy requires careful judgement in weighing up all available information, which the RBA sets out in its quarterly Statement on Monetary Policy.
Skills Match Quality Following the COVID-19 Pandemic
The strength in labour market conditions after the COVID-19 pandemic caused many individuals to either enter the labour market or to change jobs. These labour dynamics may have an influence on both recent and longer term productivity outcomes by affecting how well workers’ skills are matched to their new jobs. We use self-reported measures from the Household, Income and Labour Dynamics in Australia Survey to examine whether workers are better or less well matched to their jobs following the pandemic, and whether these skills matches may change in the future. Overall, based on the data, we find there is little evidence that the recent increase in labour mobility affected how well workers are matched to their jobs up until 2022, which suggests that this is not a key driver of recent slow productivity growth.
How the RBA Uses the Securitisation Dataset to Assess Financial Stability Risks from Mortgage Lending
The RBA’s Securitisation Dataset provides timely and detailed data on the individual mortgages underlying Australian residential mortgage-backed securities. This dataset complements other data sources the RBA uses to form its assessment of financial stability risks arising from mortgage lending. Understanding the representativeness of the dataset in relation to the broader mortgage market for key risk indicators helps to ensure that assessments are formed on a reliable basis. This article discusses the usefulness of the dataset for complementing the RBA’s broader monitoring and assessment of risks from housing lending. However, caution is needed when using the dataset to assess risks from new lending, and when monitoring arrears. Information from the dataset is one of a number of sources the RBA uses in monitoring financial stability risks and is combined with other sources of complementary data, including that provided by lenders to the Australian Prudential Regulation Authority.
Recent Drivers of Housing Loan Arrears
Housing loan arrears rates have increased from low levels since late 2022, with banks expecting them to rise a little further from here. Understanding what has been driving this increase is important for the RBA’s assessment of risks to financial stability and the economic outlook. Using loan-level data for variable-rate owner-occupier borrowers, we find that the main drivers have been challenging macroeconomic conditions and a modest ageing of the loan pool rather than risks specific to lending in a given year. Overall, highly leveraged borrowers have been most likely to fall into arrears since 2022, consistent with their generally higher arrears rates and greater vulnerability to challenging economic conditions. We assess that financial stability risks remain contained as these borrowers represent a relatively small share of total housing lending and very few loans are estimated to be in negative equity, where the loan amount exceeds the property resale value.
The Australian Repo Market: A Short History and Recent Evolution
In 2019, the repurchase agreement (repo) market became the second largest onshore short-term wholesale funding market in Australia. In addition to its size, the range of participants and diversity of collateral used to obtain funds under repo has grown in recent years. As a result, the repo market provides valuable information about conditions in short-term wholesale funding markets. This article describes the recent growth in the Australian repo market and discusses the pricing in the repo market relative to other benchmarks.
Explainer: The COVID-19 Pandemic: 2020 to 2021
This Explainer summarises the main economic effects of the COVID-19 pandemic in Australia from 2020 to 2021. It describes how policymakers responded to the pandemic, how the economy subsequently recovered, and some longer lasting challenges and disruptions.
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.
January 2024
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Understanding the Post-Pandemic Demand for Australia’s Banknotes
Banknotes can be used to make legitimate payments, but they can also be hoarded, lost or used to facilitate transactions in the shadow economy. Understanding how banknotes are used can assist policymakers in responding to changes in payment behaviour and demand for cash. This article examines the value of banknotes used for each component of cash demand and how it has changed since the COVID-19 pandemic. The share of banknotes used for transactional purposes is estimated to have fallen by 5 percentage points since early 2020, while cash use in the shadow economy has increased slightly and the proportion of banknotes that are lost has remained unchanged. Overall, the majority of banknotes on issue are currently used for non-transactional purposes, consistent with pre-pandemic trends.
Developments in Income and Consumption Across Household Groups
Data on spending by income and mortgagor status suggest that growth in consumption has slowed significantly over the past year or so across most household groups as cost-of-living pressures have weighed on household finances. High inflation has decreased the purchasing power of all households and has had a relatively similar effect on real disposable incomes across different groups. While higher interest rates have also weighed heavily on the incomes of mortgagor households, many of these households have larger financial buffers, which have helped to offset the aggregate impact of interest rates on their spending so far. Resilient growth in nominal incomes has helped to support the spending of many lower income households and renters. Nonetheless, many of these households have lower financial buffers and so increases in their cost of living are more likely to have caused financial stress with all its adverse impacts on their wellbeing. Indeed, many households are experiencing acute challenges in the face of high inflation and higher interest rates. This article explores these recent developments in consumption across household groups.
Inflation Expectations and Economic Literacy
The level of community awareness and understanding of basic economic issues can influence a central bank’s ability to achieve its goals, such as by anchoring the public’s inflation expectations in line with its inflation target. This article draws on novel data from a large-scale survey of Australian adults about their knowledge of the Reserve Bank’s inflation target and their expectations for inflation over the short and medium term. Responses to these questions varied significantly according to the socio-demographic characteristics of the survey respondents and their level of economic literacy. The results of this study point to the need for clear communication about the Bank’s inflation objectives that caters for variations in awareness and understanding of economic issues across different socio-demographic groups.
What Do Firms Tell Us About the Inflation Outlook?
The Reserve Bank’s liaison program collects information from firms in Australia about current economic conditions and their expectations for future conditions, including their own prices. Firms’ observations provide a timely read on inflation. Over the past six months, firms have generally expected their prices growth to continue to moderate, but on average to remain above the Bank’s inflation target range of 2–3 per cent. Firms have reported that large cost increases over recent years are still flowing through to some parts of the supply chain and have indicated that this is the primary driver of their decisions to increase prices at a faster-than-normal rate. Slower growth in demand and increased competition are expected to result in a further slowing in growth of firms’ prices over coming quarters.
Bank Fees in Australia
This article updates Reserve Bank research on bank fees charged to Australian households, businesses and government. Over the year to June 2023, total fees charged by banks fell by around 4 per cent. Fees comprised just 5 per cent of banks’ total revenue over the period, while over 50 per cent came from interest earnings on loans. By customer, most fees were paid by large businesses, as was the case in previous years. However, fee earnings from businesses and government declined over 2022/23, in part reflecting lower merchant services fees. On the other hand, fee income from households increased, driven by higher revenue from charges on credit cards related to international travel and increased revenue from break fees on term deposits.
The Committed Liquidity Facility: 2015–2022
The Reserve Bank’s Committed Liquidity Facility (CLF) was used from 2015–2022 to enhance the resilience of the banking system to times of liquidity stress. Banks must hold high-quality liquid assets (HQLA), including government securities, as a buffer against liquidity stress. Historically, the low level of government debt in Australia limited the amount that banks could reasonably hold, and so the CLF was introduced in 2015 as an alternative. Over time, however, the amount of government debt on issue and system liquidity increased significantly due to fiscal and monetary policy measures implemented to support the Australian economy during the COVID-19 pandemic. In response to this significant increase in HQLA, the size of the CLF was gradually reduced so that it was no longer in use at the beginning of 2023. This article provides an overview of the CLF and discusses its introduction and why it is no longer in use.
Recent Developments in the Semi-government Bond Market
The market for Australian state and territory government bonds is often referred to as the market for ‘semis’. Semi-government bonds are a key source of government funding and they form an important share of high-quality liquid assets in the Australian financial system. The COVID-19 pandemic, and state and territory government policies implemented in response, increased the size of the semi-government bond market significantly. During this period, there have also been compositional changes in the types of issuance and investors of semis. This article explores recent trends in the issuance, ownership and pricing of semi-government bonds.
Explainer: Inflation and its Measurement
This Explainer describes how inflation is measured, explains how different indicators of underlying inflation are calculated, and outlines some of the limitations of using the Consumer Price Index.
Some graphs in this publication were generated using Mathematica.
ISSN 1837-7211