RBA: Financial Stress Just the Tip of the Iceberg When Crafting Rate Policy

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RBA insists that global financial stress is a minor consideration when crafting monetary policies. Issues in certain poorly managed banks are only part of the more comprehensive picture impacting local policy decisions.

When questioned if the heightened pressure necessitated a halt in rate increases, Reserve Bank of Australia (RBA) Assistant Governor Christopher Kent declared that the Board would contemplate economic conditions during its next policy meeting in April. This was only one component among many components taken into consideration.

“The Board has remained vigilant in assessing the economic climate, as is their routine. Unfortunately, a few establishments have been poorly managed and must now be held accountable,” said Kent.

The central bank has indicated that higher rates are likely necessary to bring inflation under control. Yet, the markets believe that global banking tensions may result in the Reserve Bank of Australia’s 10-month interest rate increases ending soon.

The RBA Assistant Governor, Kent, explicitly stated that the Reserve Bank of Australia had not taken part in the dollar liquidity operations declared by the Federal Reserve and other major central banks on Sunday. Still, he further noted that he was maintaining contact with foreign counterparts.

He declared that the worldwide banking system was much better than during the international financial turmoil and proclaimed that Australia’s banks are “undeniably robust,” with capital levels surpassing mandated requirements.

Problems of delayed monetary policy were also highlighted. He noted that a higher percentage of fixed-rate mortgages and increased savings amassed during the pandemic have caused it to take longer for interest rate increases to be felt in the economy.

As the Bank pays close attention to how monetary policy is affecting household spending, employment and inflation, it stands ready to take action to bring prices back into its desired range promptly,” Kent said. 

Australian financial markets may be volatile, but the good news is that they are still operating. And more importantly, all of Australia’s banks are rock solid – with capital and liquidity levels far exceeding regulatory requirements,” Kent further stated. 

Driven by the financial instability in the global system, the central bank has pushed cash rates up to a ten-year peak of 3.6 per cent, having raised it multiple times since May last year. Kent acknowledged this pressure on the international market yet downplayed its effect on domestic banks.

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