March 2014
The Next Generation Banknote Project
A core function of the Reserve Bank is to maintain public confidence in the nation's banknotes so that they remain an effective means of payment and a secure store of wealth. This article discusses the Bank's counterfeit deterrence strategy and the central role that the Next Generation Banknote (NGB) project will play in this strategy by enhancing the security of Australia's banknotes.
The Distribution of Household Spending in Australia
This article uses household-level data to examine the distribution of spending and saving in Australia and how that has changed over time. The distribution of spending and saving is important as, among other things, it can affect the way that the household sector responds to economic shocks. The data indicate that households headed by older people have increased their share of total spending over the past two decades, reflecting both an ageing population and an increase in the average spending of older households compared with other households. The household survey data also indicate that spending is more equally distributed than income across households due to their ability to borrow and save. Moreover, consumption inequality has been little changed, despite an increase in income inequality over recent decades.
Employment Outcomes of the Economically Disadvantaged
As part of its liaison program, the Bank meets with community organisations to discuss the labour market and other opportunities and challenges faced by economically disadvantaged persons in Australia. The data available suggest that economic conditions faced by the disadvantaged generally improved over the years leading up to the global financial crisis, though they have deteriorated somewhat since then. Nonetheless, around half of those who were economically disadvantaged in 2005–06 had moved out of this category by 2011–12. Finding employment was an important pathway out of economic disadvantage, although this outcome depended in part on a person's skills and the type of job obtained. The majority of people who remained economically disadvantaged over this period were not in employment, and community organisations note that many of them face a range of structural barriers to finding employment.
Inflation and the Cost of Living
This article looks at increases in the cost of living for Australian households over the past decade. Inflation as measured by changes in the consumer price index (CPI) overstates ‘true’ increases in the cost of living due to a number of inherent conceptual differences and measurement issues. Even so, other measures of the cost of living have increased by a similar amount to the CPI over the past decade. Measured inflation has been higher for some households and socio-economic groups than for others, though the differences have generally not been large and have tended to even out over time. Although cost-of-living inflation has been moderate across most households, there are a number of reasons why some households might have perceived inflation to be higher than it actually was.
Exchange Rate Movements and Economic Activity
This article discusses estimates of the effect of movements in the real exchange rate on economic activity and inflation in Australia. The range of estimates suggests that a temporary 10 per cent depreciation of the exchange rate increases the level of GDP temporarily by ¼–½ per cent over one to two years. A permanent 10 per cent real depreciation is estimated to increase the level of GDP by around 1 per cent after two to three years and to increase year-ended inflation by ¼–½ percentage point over the same period. At an industry level, unsurprisingly, activity in trade-exposed industries is found to be more affected than in domestically oriented industries.
Australia after the Terms of Trade Boom
The Australian economy has in recent years experienced the longest terms of trade boom in its history. This boom has had important macroeconomic outcomes – such as an elevated real exchange rate, large-scale investment in the resources sector and higher national income. The terms of trade have declined since their peak in September 2011 and are expected to ease further in coming years. This article draws extensively on Atkin et al (2014) and compares recent macroeconomic developments to those that occurred historically around major peaks in the terms of trade, while also highlighting key differences in the nature of the current cycle and the macroeconomic policy framework compared with those in the past.
Housing Trends in China and India
Residential construction has made an important contribution to China's economic growth over recent decades. Given China's large population and the extensive use of steel in its urban residential development, this investment has also been an important driver of growing demand for Australia's exports of iron ore and coking coal. India's population is of a comparable size to that of China. However, despite its faster population growth, India's slower pace of urbanisation and less intensive use of steel in its housing construction has meant that housing activity in India has not been a major source of demand for iron ore and coal. This article explores the trends in the main factors that influence the amount and nature of investment in housing in China and India, and assesses the long-term outlook for residential construction in these two economies.
Developments in Banks' Funding Costs and Lending Rates
This article updates previous Reserve Bank research on how developments in the composition and pricing of banks' funding have affected their overall cost of funding and the setting of lending rates (Deans and Stewart 2012; Robertson and Rush 2013). The main findings are that the absolute levels of banks' funding costs and lending rates have fallen over the past year, and spreads between these rates and the cash rate have narrowed marginally. The decline in these spreads largely reflects the shifts in the composition of banks' funding liabilities and the narrowing of wholesale debt spreads. Lending rates have tended to move in line with funding costs over the past 12 months.
Non-dealer Clearing of Over-the-counter Derivatives
In 2009, the G20 leaders agreed that all standardised over-the-counter (OTC) derivatives should be cleared through central counterparties (CCPs). Accordingly, an increasing proportion of OTC derivatives are now centrally cleared, particularly where the trading counterparties are large ‘dealer’ firms. However, for many smaller financial institutions and non-financial corporations, there remain material challenges in adopting central clearing. Such firms usually access CCPs indirectly through arrangements with larger dealer firms – so-called ‘client clearing’ arrangements. While non-dealers have long used such arrangements for their exchange-traded activity, increased CCP clearing of OTC derivative products has prompted market participants and policymakers to examine more closely these arrangements. Aspects of the design of client clearing arrangements, such as collateral requirements, operating schedules, and the degree of segregation of positions and collateral, can all have material implications for the costs and risks a firm faces in its OTC derivative trading activity. Some of these aspects could also have broader implications for financial stability.
The graphs in the Bulletin were generated using Mathematica.
ISSN 0725–0320 (Print)
ISSN 1837-7211 (Online)