December 2017
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Reporting Australia's Foreign Reserve Holdings
The Reserve Bank of Australia reports details of Australia's official reserve assets, foreign currency liquidity and net foreign reserves on a monthly basis. This article details changes that will make the Bank's reporting methodology consistent with current guidelines published by the International Monetary Fund (IMF). Data will be revised back to January 2015. While the new methodology implies a reduction in the reported gross level of Australia's official reserve assets, net foreign reserves will remain unchanged.
The Reserve Bank's Collateral Framework
The Reserve Bank, like other central banks, holds collateral to reduce the risk of financial loss in its domestic market operations. The Reserve Bank's collateral framework sets out how the diverse portfolio of collateral assets is managed and ensures that collateral of sufficient quality and value is held at all times. Over the past two decades, the framework has been adjusted to address changes in collateral supply, changes in market functioning during the global financial crisis, payment system innovations and new banking regulations. This article explores the rationale for these changes and discusses the key features of the current framework.
Housing Accessibility for First Home Buyers
The ability of Australians to purchase their first home (‘housing accessibility’) has been an important topic of public debate recently. In this article, we construct an indicator of housing accessibility that suggests that the median potential first home buyer can currently afford about one-third of homes in Australia. However, accessibility varies significantly with geographic location, and the quality of housing affordable to potential first home buyers has declined, particularly in Sydney.
Underlying Consumer Price Inflation in China
Underlying inflation measures seek to look through the volatility often inherent in headline inflation, and can be useful for assessing inflationary pressures in a given economy. This article describes new trimmed mean measures of underlying inflation that we have constructed for China and compares their performance with other measures of underlying consumer price inflation. A range of underlying inflation measures suggest that inflationary pressures have increased gradually since early 2016, although they remain low by historical standards.
Ageing and Labour Supply in Advanced Economies
Population ageing is a global trend, which is most evident in advanced economies. This article details the impact of demographic developments on labour supply in advanced economies. The ageing of the workforce has tended to reduce labour supply. This has been mostly offset by increased labour force participation of women and older people. These trends are occurring in Australia, although strong migration has mitigated some of the impact of ageing.
Recent Developments in the ATM Industry
The ATM industry in Australia is undergoing a number of changes. Use of ATMs has been declining as people use cash less often for their transactions, though the number of ATMs remains at a high level. The total amount spent on ATM fees has fallen, and is likely to decline further as a result of recent decisions by a number of banks to remove their ATM direct charges. This article discusses the implications of these changes for the competitive landscape and the future size and structure of the industry.
The Availability of Business Finance
Access to business finance has improved markedly since the global financial crisis, and debt-servicing costs are near historic lows. Nevertheless, small businesses continue to face challenges accessing finance. This article looks at the sources and availability of finance for Australian businesses. It also explores several innovations, such as comprehensive credit reporting and alternative finance platforms. These could make financing more accessible for small businesses in the start-up or expansion phase.
Foreign Currency Exposure and Hedging in Australia
The latest Survey of Foreign Currency Exposure confirms that Australian entities' financial positions are well protected against a depreciation of the Australian dollar. Consistent with previous surveys, the net foreign currency exposures of the banking sector are fully hedged. This means that the sector's overall foreign currency liability position would not in itself be a source of vulnerability in the event of a sudden depreciation of the Australian dollar.
Foreign Exchange Derivative Markets in Asia
Activity in foreign exchange derivative markets in Asia has increased in recent years, along with greater incentives to hedge exchange rate risk. But these markets are more developed for the currencies of advanced Asian economies than emerging Asian economies. Foreign exchange derivative markets also tend to be deeper for Asian economies that are more integrated into global financial markets and have flexible exchange rates.
Central Counterparty Margin Frameworks
A central counterparty's (CCP's) margin framework can affect the activity of market participants and the broader functioning of the financial system. This potential impact on financial stability is an area of focus for authorities – in Australia and overseas – particularly as central clearing has grown in recent years. Additionally, the margin collected by CCPs is the first layer of financial resources held by a CCP to cover counterparty credit risk, so it is critical that a CCP's margining system is effective.
September 2017
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The Transmission of Monetary Policy: How Does It Work?
The transmission of monetary policy refers to how changes to the cash rate affect economic activity and inflation. This article outlines the stages of transmission and the channels through which it occurs. The effects of monetary policy are hard to quantify, though the housing market seems particularly important to the transmission process in Australia. A lower cash rate stimulates household spending and housing investment, partly through increasing the wealth and cash flow of households. A lower cash rate also tends to result in a depreciation of the exchange rate, leading to higher net exports and imported inflation.
The Neutral Interest Rate
Central banks monitor the neutral interest rate for a number of reasons, a key one being that it provides a benchmark for assessing the stance of monetary policy. This article describes the determinants of the neutral interest rate and discusses its trends in Australia over recent decades. We estimate that Australia's neutral interest rate has declined by 150 basis points since 2007 and is currently around 1 per cent. However, because we cannot observe the neutral rate directly, there is considerable uncertainty around these estimates. The fall over the past decade is largely attributable to a decline in the economy's potential growth rate and an increase in risk aversion of households and firms.
The Rising Share of Part-time Employment
One of the most significant changes to the Australian labour market in recent decades has been the rise in the share of part-time employment to account for nearly one-third of total employment. This article details the various supply and demand factors that have underpinned the increase in part-time employment, as well as some of the characteristics of part-time workers. Because there are some part-time workers who want to work additional hours, it is useful to consider underemployment as well as unemployment in measuring labour market spare capacity.
The Resources Economy and the Terms of Trade Boom
The transition from the investment to the production phase of the resources boom is nearly complete. The adjustment has affected industries beyond the resources sector, which has amplified the impact of the resource investment boom on the Australian economy. The value added and employment shares of this broader ‘resources economy’ have retreated from their 2011/12 peaks, but remain above their pre-boom averages.
Structural Liquidity and Domestic Market Operations
The Reserve Bank is a net supplier of liquidity to the Australian financial system. This reflects demand for the Reserve Bank's liabilities from its customers, as well as the asset allocation decisions of the Reserve Bank. The key drivers of variations in the amount of liquidity supplied by the Reserve Bank have been fluctuations in government deposits and the demand for banknotes. The Reserve Bank meets the demand for liquidity through its domestic market operations.
Shadow Bank Lending to the Residential Property Market
Shadow bank lending can play an important role in the economy, but on a large enough scale it could damage financial system resilience. Domestic banks have tightened standards for lending to the residential property market over recent years, creating an opportunity for other lenders to expand. However, shadow banks appear to account for only a small share of total property loans in Australia. Their share of lending for property development has increased more than for housing lending.
Covered Bonds in Australia
Since their introduction in Australia in 2011, the stock of covered bonds has grown to around $80 billion, or around 15 per cent of Australian financial institutions' long-term debt. Covered bonds are a form of secured funding backed by both the issuer and a specific pool of assets. In practice, covered bonds are typically issued by banks and secured against pools of residential mortgages. Since they are secured against assets, covered bonds provide increased protection for lenders. As a result, they can be issued at lower yields and longer tenors than unsecured bonds and can be easier to issue during periods of market stress. However, covered bonds can reduce the protection of other unsecured creditors who then may require extra return.
The Growing Demand for Cash
While survey data indicate that the share of Australian consumers' payments made with cash continues to fall, the number (and value) of banknotes in circulation continues to grow at around its trend pace of 6 per cent per year. This article discusses the reasons for these diverging trends, including: population, inflation and real income growth; a slower decline in total (rather than relative) cash payments; high cash users not captured by survey data; and the increasing stock of banknotes held for non-transactional purposes.
Trends in Global Foreign Currency Reserves
Over the decade to 2014, global foreign currency reserves doubled relative to GDP, though balances have declined a little since then. Accompanying this growth has been a shift in the composition of reserves towards higher-yielding assets, including equities and non-traditional reserve currencies, such as the Australian dollar. This article examines the overall growth trend as well as the potential causes of the compositional shift in reserves, including a decline in yields offered by traditional reserve assets and higher reserve balances.
June 2017
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Houses and Apartments in Australia
Apartments have become an important part of the housing mix in Australia. This has several implications for assessments of residential activity. The lag from a change in monetary policy to the effect on residential activity might increase, because it takes longer to build large apartment buildings than detached houses. Apartment developments use different construction materials and labour, and may face different cost pressures to the detached house segment. They also face different supply-side constraints.
Estimating the NAIRU and the Unemployment Gap
Spare capacity in the labour market is an important input into forecasts of inflation and wage growth. This article describes how the Bank estimates one measure of spare capacity in the labour market – the gap between the unemployment rate and the non-accelerating inflation rate of unemployment (NAIRU). Model estimates of the NAIRU are highly uncertain and can change quite a bit as new data become available. The estimates suggest that the NAIRU has declined since the mid 1990s and is currently around 5 per cent.
Australian Capital Flows
Capital inflows have underpinned the expansion of Australia's productive capacity for the past 200 years or more. Recently, there have been three noteworthy changes in the composition of these flows. First, most inflows to the mining sector are now direct funding from offshore, rather than reinvested earnings. Second, foreign investors have been more actively managing their holdings of Australian government debt securities. Third, regulatory reforms have led to changes in banks' short-term debt funding.
Banking Fees in Australia
The Reserve Bank has conducted an annual survey on bank fees since 1997. The most recent survey suggests that banks' aggregate fee income increased at a relatively slow pace in 2016. Deposit and loan fee income continued to decline relative to the value of products on which these fees are levied. Greater use of electronic payment methods continued to support moderate growth in credit card and merchant service fee income.
How Have Australian Banks Responded to Tighter Capital and Liquidity Requirements?
Australian banks have responded to tighter regulatory requirements for capital and liquidity over the past decade, which has strengthened their resilience to adverse shocks. While banks are now in a much better position to deal with these types of shocks, this strengthening has also had implications for their funding costs and some key profitability metrics. This article outlines some of the main changes to banks' activities as they have responded to the tighter capital and liquidity requirements.
The Australian Exchange-traded Funds Market
Assets under management in the Australian exchange-traded funds (ETF) market have more than tripled over the past four years to around $25 billion. ETFs enable investors to gain exposure to a wide range of assets at relatively low cost. Australian ETFs have generally replicated their investment benchmarks closely and deviations have tended to be small and temporary. However, there are some potential risks associated with investing in ETFs.
The Ongoing Decline of the Cheque System
Cheque use in Australia has declined significantly over the past few decades and currently represents only a small share of non-cash payments. This decline reflects changes in the payments market as a result of technological change and customer preferences for faster, digital payments. To ensure that the payment needs of individuals and businesses continue to be met, the payments industry has embarked on a number of initiatives to manage the decline in cheque use.
Conditions in China's Listed Corporate Sector
The financial statements of listed companies provide a detailed insight into the broader conditions faced by businesses in China. Listed firms have deleveraged over the past few years, although declining profitability has reduced their capacity to cover interest payments, especially for state-controlled firms. High leverage and declining profitability in the real estate and construction sectors remain a concern, especially given these sectors have been a key driver of economic growth in recent years.
The Chinese Interbank Repo Market
The market for repurchase agreements (repos) is an important source of short-term funding for financial institutions operating in China. This article outlines the key features of Chinese repo markets, focusing on the interbank market, before discussing recent developments and their impact on the bond market. Repo rates have fallen and become less volatile over the past couple of years, encouraging greater risk-taking in financial markets. Policy settings in China have both shaped and responded to these developments.
March 2017
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The Recent Economic Performance of the States
Economic growth in Australia's south-eastern states has underpinned a gradual strengthening in the non-mining economy in recent years. In contrast, economic conditions have been weaker in Western Australia and Queensland as the large-scale mining investment in these states has concluded. Differences in investment have been a key source of regional variation in activity, but there are also common themes across a range of economic indicators, such as growth in the services sector.
Insights into Low Wage Growth in Australia
Recent low wage growth in Australia appears to be only partly explained by spare capacity in the labour market, the decline in inflation outcomes and the decline in the terms of trade from its 2011 peak. In this article, we present some tentative evidence that the relationship between wage growth and labour market conditions may have changed, and that this may help to explain recent low wage growth. Using job-level micro wage data, we also find that, since 2012, wage increases have been less frequent and wage growth outcomes have become much more similar across jobs.
Housing Market Turnover
The rate of housing market turnover, an important indicator of housing market conditions, has trended lower since the early 2000s. This is partly because households are moving less often and fewer own their own homes. More recently, the increase in apartment building is likely to have resulted in measured turnover being understated. A lower housing turnover rate could reduce housing-related economic activity and might lead to lower household leverage than otherwise.
Inflation Expectations in Advanced Economies
Anchored inflation expectations are important for price stability because expectations affect current actions. Although all inflation expectations measures provide some information about future inflation, professional forecasters have been the most accurate in predicting future inflation, while market-implied and consumer measures have tended to be less so. Recent declines in inflation expectations have been concentrated in the measures that have historically been less accurate predictors. The more accurate measures have been more stable and have remained close to central banks' inflation targets.
Developments in Banks' Funding Costs and Lending Rates
This article updates previous Reserve Bank research on the ways in which developments in the composition and pricing of banks' debt funding have affected their overall cost of funds and influenced lending rates. Major banks' outstanding funding costs and lending rates declined in 2016, following two reductions in the cash rate. However, lending rates and funding costs did not decline by as much as the cash rate. This was largely due to an increase in the cost of deposit funding, which reflected competition between financial institutions for deposits.
Return on Equity, Cost of Equity and the Implications for Banks
Returns on equity for the major Australian banks have declined of late, following equity raisings in 2015. At the same time, estimates of the cost of raising new equity appear to have fallen very little, despite large declines in risk-free rates. These two developments help to explain why Australian bank stocks are now trading at a declining, but still sizeable, premium to their book value.
How Australians Pay: New Survey Evidence
The Reserve Bank's 2016 Consumer Payments Survey showed that Australian consumers are increasingly using their debit or credit cards instead of paying in cash or writing cheques. While more and more small payments are being made with contactless ‘tap and go’ cards, cash is still often used for lower-value transactions and accounts for a significant share of payments for some segments of the community.
Recent Trends in Banknote Counterfeiting
Counterfeiting banknotes is a crime under Australian law. Although counterfeiting in Australia remains modest by international standards, the rate of counterfeiting has been rising in recent years as counterfeiters have increasingly taken advantage of developments in printing and copying. To ensure that counterfeiting remains low and banknotes remain a secure payment method, the Reserve Bank of Australia is issuing a new series of banknotes with upgraded security features. This article discusses trends highlighted by the Reserve Bank's ongoing monitoring and analysis of banknote counterfeiting activity in Australia.
The Rise of Chinese Money Market Funds
Money market funds (MMFs) pool funds in an investment vehicle to invest in short-term, highly rated securities. The MMF sector in China has grown rapidly over the past few years and is now the world's second largest by assets, though it is small compared with China's domestic bank deposits. This growth has been driven by investors attracted by high yields relative to bank deposits and technological developments that allow Chinese MMFs to offer a convenient cash management service. Chinese MMFs differ from similar products in many other countries: they tend to be more leveraged, and they offer more liquidity and maturity transformation. Nonetheless, recent regulatory reforms to address vulnerabilities have taken a similar direction to reforms globally.
The graphs in the Bulletin were generated using Mathematica.
ISSN 0725–0320 (Print)
ISSN 1837-7211 (Online)