Economic shocks ‘will occur’: RBA

The structure of the Australian economy will likely “continue to change” between 2017 and 2021, the central bank has said while warning that economic shocks will also occur.

In its 2017/18 Corporate Plan, the Reserve Bank of Australia (RBA) said that its monetary policy performance objective was to achieve an inflation target of 2–3 per cent over the medium term. However, the bank noted that there have been “considerable challenges in the conduct of monetary policy globally” and that the global policy environment “remains uncertain”.

“There is still significant uncertainty about the future path of monetary policy in the major economies,” the RBA said. These global influences have an important effect on the environment in which monetary policy in Australia is conducted.

Pointing to “extremely low” interest rates around the world and subdued inflation, the RBA commented: “The current period of highly accommodative monetary policies is unprecedented.”

“Over 2017/18 to 2020/21, the structure of the Australian economy is likely to continue to change and economic shocks — which, by definition, are not forecastable — will occur,” the RBA continued.

“Movements in asset values and leverage may be more important for economic developments than in the past, given the already high levels of debt on household balance sheets.”

The Reserve Bank forecasts that stagnating wage growth and the effects of the economy’s post-mining boom adjustment will “dissipate slowly”, with wages picking up gradually in the next two years.

However, the RBA added that “policymakers are wary of the implications of a further substantial build-up in debt”, and noted that high levels of debt could also limit the ability of the RBA monetary policy to stimulate growth.

“Assessing the conduct of monetary policy will, as always, involve judging whether the policy decisions taken were prudent and consistent with the objectives of monetary policy, based on the information available at the time.”

Banks’ resilience ‘improved’ but RBA ‘open to’ further measures

The RBA said that the Australian economy’s financial stability had been assisted by the “strong performance of the domestic banking system” and commended Australian banks’ improved resilience.

“Australian banks have improved their resilience to future financial and economic shocks by increasing their capital ratios in recent years, and are working to strengthen their lending standards, particularly for their mortgage business,” the corporate plan reads.

Domestic banks are also expected to continue to increase capital ratios over the next two years to meet a common equity tier one (CET1) ratio of 10.5, as mandated by the Australian Prudential Regulation Authority (APRA) in July.

“This will further enhance banks’ resilience to potential domestic and external risks,” the RBA said.

Acknowledging this, the RBA nonetheless said that it continues to “closely monitor developments” in home financing and the risks to household balance sheets associated with it “given the environment of high housing prices and high and rising household debt”.

“In this environment of heightened risk, both APRA and the Australian Securities and Investments Commission (ASIC) took measures to reinforce sound residential mortgage lending practices in late 2014 and again in early 2017.

“The Council of Financial Regulators (CFR) remains open to considering further measures if necessary.”

The CFR is a non-statutory body with a mandate to “contribute to the efficiency and effectiveness of financial regulation and to promote stability of the Australian financial system”. It is chaired by the RBA, and APRA, ASIC and the Treasury are members.

[Related: 'Marginal’ borrower activity critical to financial stability: RBA]

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Lucy Dean

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