Reserve Bank of Australia: Households, businesses can weather slower economy, falling house prices
In its Financial Stability Review (FSR) published on Thursday, the Reserve Bank of Australia (RBA) said that “households and businesses are well placed to weather a slower economy and falling house prices.”
Additional takeaways
Even if house prices fell a further 20%, only 5% of mortgages would be in negative equity.
Less than 1% of borrowers in negative equity, houshold balance sheets remain strong.
Banks well positioned to weather a material deterioration in housing market.
Pockets of stress in households and business, but resilient overall with low loan arrears.
Most businesses well placed to manage elevated costs, some passing on to customers.
Share of owner-occupier borrowers with cash flow shortfall still low at around 2%.
Cash flow pressures to increase for smaller businesses, energy-intensive firms.
Major risks to domestic financial stability coming from abroad.
Lending standards remain sound, riskier forms of lending restrained.
AI funding globally is growing more opaque, circular and at risk of profit disappointment.
Private credit not yet a threat to overall financial stability in Australia.
Private credit has grown significantly in Australia, but still only small overall.
Rise of leveraged investors in bonds, AI equities amplifies volatility and adds to risks.
High asset prices, leverage mean world markets vulnerable to disruptive pullback.
Market reaction
At the time of writing, AUD/USD is holding steady at 0.6944, with little movement from the above report.
RBA FAQs
The Reserve Bank of Australia (RBA) sets interest rates and manages monetary policy for Australia. Decisions are made by a board of governors at 11 meetings a year and ad hoc emergency meetings as required. The RBA’s primary mandate is to maintain price stability, which means an inflation rate of 2-3%, but also “..to contribute to the stability of the currency, full employment, and the economic prosperity and welfare of the Australian people.” Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will strengthen the Australian Dollar (AUD) and vice versa. Other RBA tools include quantitative easing and tightening.
While inflation had always traditionally been thought of as a negative factor for currencies since it lowers the value of money in general, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Moderately higher inflation now tends to lead central banks to put up their interest rates, which in turn has the effect of attracting more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in the case of Australia is the Aussie Dollar.
Macroeconomic data gauges the health of an economy and can have an impact on the value of its currency. Investors prefer to invest their capital in economies that are safe and growing rather than precarious and shrinking. Greater capital inflows increase the aggregate demand and value of the domestic currency. Classic indicators, such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can influence AUD. A strong economy may encourage the Reserve Bank of Australia to put up interest rates, also supporting AUD.
Quantitative Easing (QE) is a tool used in extreme situations when lowering interest rates is not enough to restore the flow of credit in the economy. QE is the process by which the Reserve Bank of Australia (RBA) prints Australian Dollars (AUD) for the purpose of buying assets – usually government or corporate bonds – from financial institutions, thereby providing them with much-needed liquidity. QE usually results in a weaker AUD.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Reserve Bank of Australia (RBA) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the RBA stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It would be positive (or bullish) for the Australian Dollar.
Author
Dhwani Mehta
FXStreet
Residing in Mumbai (India), Dhwani is a Senior Analyst and Manager of the Asian session at FXStreet. She has over 10 years of experience in analyzing and covering the global financial markets, with specialization in Forex and commodities markets.
