Reserve Bank of Australia intervention to foreign exchange market

 The Reserve Bank of Australia (RBA) plays a crucial role in managing the Australian economy and maintaining stability in the Australian dollar (AUD) exchange rate (Kent 2022). The AUD/USD exchange rate is an important indicator of the Australian economy's health, and the RBA's reaction to the factors affecting this rate is critical for the foreign market. In this blog, we will discuss some of the factors that has contributed to the declining value of AUD and the invention of the RBA to the foreign exchange market.

Graph 1: AUD/USD Exchange Rate

                            Source: RBA

The Australian dollar has had a difficult year, with its value continuously falling against the US dollar (AUD/USD) since April till date. As of December 6, 2022, the Australian dollar's year-to-date performance versus the US dollar was -7% (Piero, 2022). From the graph above, the AUD/USD exchange rate has fluctuated between a low of around 0.68 USD per AUD and a high of around 0.67 USD per AUD. However, there has been a massive climb of 0.71 USD per AUD. There have been several factors that have influenced the exchange rate, including changes in interest rates, economic growth, and geopolitical events which will be covered in this blog.

In early 2022, the AUD/USD exchange rate was impacted by rising interest rates in the United States (Sophie and Johanna 2022). This resulted in a decline in the value of the Australian dollar relative to the US dollar, with the exchange rate falling to a low of around 0.68 USD per AUD in March 2022. However, in the second half of 2022, the AUD/USD exchange rate started to recover. This was due to several factors, including a rebound in demand for commodities, particularly iron ore, which is a key export for Australia. This led to an increase in the value of the Australian dollar relative to the US dollar. According to data from Westpac, the Australian dollar was 0.738 cents to the US dollar in March 2022. In April, 0.736; May, 0.705; June, 0.702; July 0.686; a slight increase in August to 0.696; and back down significantly to 0.667 for the month of September (Sophie and Johanna 2022).

How does the Reserve bank intervene in the foreign exchange market?

In general, the Reserve Bank intervene by transacting in the foreign exchange market under its own name in order to alert market players to its presence. This 'announcement effect' can have a considerable impact on the currency rate since it informs the market about the Reserve Bank's policy views on the exchange rate (RBA, 2020). Banks will raise their Australian dollar offer quotations, for instance, if the Reserve Bank wishes to sell US dollars and buy Australian dollars. Second, this can lead to further price changes among market makers in the spot foreign currency market after banks have transacted with the Reserve Bank (RBA, 2020).

References

Atkin T. Caputo, M. Robinson, T. and Wang, H., 2014. Macroeconomic consequences of terms of trade episodes, past and present, RBA Research Discussion Paper No 2014-01.

Atkin T. and La Cava G., 2018. The transmission of monetary policy: How Does It Work?’, RBA Bulletin, September.

Sophie, V. and Johanna L., 2022. AUD To USD Forecast: Dollar Could Fall Further Amid US Recession Fears. [online] Available at: https://www.forbes.com/advisor/au/investing/currencies/aud-to-usd-forecast-and-trends/.

Guo J. Ranasinghe, D. and Zhang, Z., 2019. Developments in foreign exchange and over-the-counter derivatives Markets’, RBA Bulletin, December.

Kent, C., 2022. Exchange rates and inflationary pressures | Speeches. [online] Reserve Bank of Australia. Available at: https://www.rba.gov.au/speeches/2022/sp-ag-2022-10-24.html

Piero C., 2022. Australian dollar (AUD/USD) 2023 price outlook: Aussie to soar on China’s reopening and Fed pivot? [online] Available at: https://capital.com/australian-dollar-aud-usd-2023-price-outlook-aussie-to-soar-on-china-s-reopening-and-fed-pivot.

Reserve Bank of Australia, 2020. The Exchange Rate and the Reserve Bank’s Role in the Foreign Exchange Market. [online] Reserve Bank of Australia. Available at: https://www.rba.gov.au/mkt-operations/ex-rate-rba-role-fx-mkt.html#eight [Accessed 23 Mar. 2023].

Newman V. Potter, C. and Wright, M., 2011. Foreign exchange market intervention, RBA Bulletin, December.

Stevens G., 2013. The australian dollar: Thirty years of floating, Address to the Australian Business Economists’ Annual Dinner, Sydney, 21 November.

Reserve bank of Australia contribution to the matter of diversity in the field of economics in view of SDG 4 and 5

 

According to the U.N SDG 4 framework 4.5 to eliminate gender disparities in education and ensure equal access to all levels of education and vocational training for the vulnerable, including persons with disabilities, indigenous peoples, and children in vulnerable situations by 2023 and the UN SDG 5 framework 5.1 to end all forms of discrimination against women and girls everywhere. The Reserve Bank of Australia (RBA) has been actively working to promote diversity in the field of economics. In a speech given in September 2022 by Jacqui Dwyer, RBA head of information department discussed the importance of diversity in economics and the steps the RBA is taking to encourage broad-based participation in the field. To understand the reason for the lack of diversity in the field of economics, RBA provide graphical representation of student’s enrolment in economics and their topic of their topic of interest, in order to identify potential solutions.

Graph 1: Economics Enrolments by Sex

Graph 1 shows the change in the number of male and female students studying economics in Year 12 in Australia over time, up to 2022. The left-hand panel of the graph shows the number of male and female students studying economics in Year 12 in 1990, while the right-hand panel shows the same data for 2022. In 1990, the graph shows that there were roughly equal numbers of male and female students studying economics in Year 12. However, over time, the number of female students studying economics has decreased, while the number of male students has remained relatively stable. By 2022, the graph shows that there are roughly twice as many male students studying economics in Year 12 as there are female students.

Graph 2: Topics of Interest

Graph 2 shows the percentage of high school students who are interested in various topics related to economics. The graph is divided into two sections:  "Males," and "Female's

For "Males," the most popular topics of interest are "Money and finance" (at 59%) and "Jobs and employment" (at 52%). Other topics of interest include "International trade and relations" (at 32%), "Government and public policy" (at 31%), and "Poverty and inequality" (at 29%).

For "Females," the most popular topics of interest are "Jobs and employment" (at 44%) and "Money and finance" (at 41%). Other topics of interest include "Poverty and inequality" (at 23%), "Government and public policy" (at 22%), and "Globalisation and the environment" (at 20%).

Overall, the graph shows that female students tend to be more interested in topics related to employment and the environment, while male students tend to be more interested in topics related to finance and trade. RBA (2022) questions if the declining participation of women in economics could result in the loss of future female leaders in the field, such as Kerry Schott, Sue Richardson, Mardi Dungey’s and Mardi Dungey. These women have made significant contributions to economics, including identifying problems in utilities markets, influencing fair work conditions and minimum wages, and modelling economies and their international influences.

RBA were able to identify that one of the reasons for this decline in economics education has resulted in a geographic concentration of economics courses in New South Wales and the Australian Capital Territory, making it more difficult for students in other regions to access economics education (RBA, 2022). To address this issue, the RBA is working to encourage more students to study economics and to make economics education more accessible to students in all regions of Australia. The RBA is partnering with universities and schools to promote economics education and is also providing scholarships to students from diverse backgrounds to study economics (RBA, 2022)

Another issue is the diversity in the economics field which is as a result of the share of female students enrolled in economics been declining, which will affect the composition of the economics profession for years to come. To address this issue, the RBA is working to encourage more women to study economics and to promote gender diversity in the economics profession. The RBA is partnering with universities and schools to promote economics education among women and is also providing scholarships to female students to study economics (RBA, 2022)

Conclusion

RBA is playing an important role in promoting diversity in the field of economics which is also part of the SDG goal 4 and 5. The RBA recognizes the importance of geographic, gender, and other forms of diversity in economics education and the economics profession. The RBA is taking concrete steps to encourage broad-based participation in economics and to promote diversity in the economics profession. By doing so, the RBA is helping to ensure that the economics profession is better equipped to tackle the complex challenges facing the Australian economy.

References

Dwyer, J. 2018. What Happened to the Study of Economics?, Address to the Business Educators Australasia Annual Meeting, Sydney, 26 May.

Livermore, T., and Major, M. 2020. Why Study (or Not Study) Economics? A Survey of High School Students, RBA Bulletin, June;

Livermore, T. and Major, M., 2021. What Is Driving Participation and Diversity Trends in Economics? A Survey of High School Students, RBA Research Discussion Paper No 21-0

Dwyer J. 2017. Studying Economics: The Decline in Enrolments and Why it Matters, Address to the Business Educators Australasia Annual Council Meeting, Sydney, 29 July.

May, A.M, McGarvey, M.G. and Whaples, R., 2014. Are Disagreements Among Male and Female Economists Marginal at Best? A Survey of AEA Members and their Views on Economics and Economic Policy’, Contemporary Economic Policy, 32, pp 111-132

May, A.M. McGarvey, M.G. and Kucera, D., 2018. Gender and European Economic Policy: A Survey of the Views of European Economists on Contemporary Economic Policy’, Kyklos, 71(1), pp 162-183.

Fraser, B., 2022. Diversity in Economics – RBA Query, Email to J Dwyer.

Heath, A., 2017. Skills for the Modern Workforce, Remarks to the Career Education Association of Victoria Conference, Melbourne, 1 December.

Sustainable Development Goals (n.d.). Indicators and a Monitoring Framework for the Sustainable Development Goals | Department of Economic and Social Affairs. [online] Available at: https://sdgs.un.org/publications/indicators-and-monitoring-framework-sustainable-development-goals-17958.

Reserve Bank of Australia. (2022, September 28). Economics Education and Diversity: Why It Matters and What We Can Do About It. Retrieved from https://www.rba.gov.au/speeches/2022/sp-so-2022-09-28.html

 

Reserve Bank of Australia response to the cost of funding for the banking system and enterprises

 

Banks can raise funds from a variety of sources, including deposits, wholesale debt, and equity (Beau, Hill, Hussain, and Nixon, 2014). The cost of bank funding impacts a wide range of economic variables, with substantial consequences for both monetary and financial stability (Beau, Hill, Hussain, and Nixon, 2014). In other words, if loan servicing becomes more expensive, it could lead to more loan defaults by borrowers, which could hurt the bank's financial health and even have broader implications for the overall economy.

In Australia due to the economic challenges faced by the COVID-19 pandemic, the Reserve Bank of Australia took various policy measures to support households and businesses. One of the measures included reducing the cash rate target to historically low levels to lower the cost of funding for banks through the Term Funding Facility (TFF) and to ensure the continued supply of credit to households and businesses (RBA 2022c, Kent 2021). The TFF (Term Funding Facility) offers affordable funding for a duration of three years to authorised deposit-taking institutions (ADIs) with the aim of boosting the availability of credit. Additionally, it encourages ADIs to expand their lending to businesses, particularly small and medium-sized enterprises (SMEs) (Alston, Black, Jackman, and Schwartz, 2020).

The purpose of this blog is to provide a comprehensive analysis, supported by visual aids, of how the Term Funding Facility has played a significant role in decreasing the cost of funding for banks, enterprises, and individuals.

Graph 1: Bank’s lending rates and funding cost reduced

From the graph 1 above, it shows that funding costs and lending rates fell sharply in 2020. This was due to the Reserve Bank of Australia's introduction of the Term Funding Facility in 2020. The RBA cut the official cash rate to a record low of 0.10% and implemented a range of other measures such as the Term Funding Facility, which provided banks with low-cost funding.

Lender’s Rate reduced

Graph 2.1: Housing rate reduced

Graph 2.2 Business Rates

From the figure above, it can be observed that before the introduction of TFF in march 2020, housing lender rate was set as 3.57 and significantly reduced to 2.86 in April 2022 before taking a rise due to the rise in interest rate in 3th May 2022. Likewise in the business sector, the lender rate significantly reduced to 4.11, 2.6 and 1.55 for small, medium and large businesses before taking an increase due to the rise in interest rate in 3th May 2022. In RBA March 2022 Bulletin, the Reserve Bank of Australia (RBA) stated that banks' outstanding funding costs have decreased by an estimated 85 basis points, which has led to a decline in the interest rates paid by borrowers on both housing and business loans. Specifically, the RBA estimated that interest rates paid on outstanding housing loans have dropped by approximately 100 basis points, while interest rates on outstanding business loans have decreased by approximately 115 basis points during the same time period. This suggests that the reduction in funding costs for banks has been passed on to borrowers in the form of lower interest rates on their loans.

Graph 3: Major banks’ bonds issuance reduced

From the Graph 3, it would say that before the introduction of the TFF during the pandemic, Major banks in Australia relied heavily on bond issuance to fund their lending activities. With the introduction of the TFF, the graph shows that the issuance of long-term bonds by Australian banks was subdued in early 2020, with only a small uptick in the 2021 compared to the levels seen prior to TFF. In December 2021, outstanding bank bonds were around AUD 143 billion, down from a peak of around AUD 190 billion in mid-2019.

Conclusion

The Reserve Bank of Australia's implementation of the Term Funding Facility in response to the economic challenges posed by the COVID-19 pandemic has significantly reduced the cost of funding for banks, enterprises, and individuals. Graph 1 shows a sharp decline in funding costs and lending rates from 2020, which can be attributed to the introduction of the TFF. Graphs 2.1 and 2.2 show a significant reduction in housing and business lending rates before taking a rise due to the rise in interest rates in May 2022. The reduction in funding costs for banks has been passed on to borrowers in the form of lower interest rates on their loans. Graph 3 shows a reduction in the issuance of long-term bonds by Australian banks, which highlights the success of the TFF in providing affordable funding to banks. Overall, the TFF has played a crucial role in ensuring the continued supply of credit to households and businesses, particularly small and medium-sized enterprises, during a challenging economic period.

References

APRA (2021a), ‘Committed Liquidity Facility Update’, Letters, 10 September.

APRA (2021b), ‘Finalising Loss-absorbing Capacity Requirements for Domestic Systematically Important banks’, Letters, 2 December.

Aziz A, C de Roure, P Hutchinson and S Nightingale (2022), ‘Australian Money Markets through the Pandemic’, RBA Bulletin, March.

Alston, M., Black, S., Jackman, B. and Schwartz, C., 2020. The Term Funding Facility. RBA Bulletin, December, viewed, 22.

Beau, E., Hill, J., Hussain, T. and Nixon, D., 2014. Bank funding costs: what are they, what determines them and why do they matter? Bank of England Quarterly Bulletin, p.Q4

Black, S., Jackman, B. and Schwartz, C., 2021. An Assessment of the Term Funding Facility| Bulletin–September 2021.

Black, S. and Titkov, D., 2019. Developments in Banks' Funding Costs and Lending Rates| Bulletin–March 2019.

Fitzpatrick, R., Shaw, C. and Suthakar, A., 2022. Developments in Banks' Funding Costs and Lending Rates| Bulletin–March 2022.

Kent C (2021), ‘The Term Funding Facility, Other Policy Measures, and Financial Conditions’, Address to KangaNews, Online, 9 June.

RBA (2022a), ‘Banks’ Funding Costs and Lending Rates', Explainer.

RBA (2022b), ‘The Transmission of Monetary Policy’, Explainer.

RBA (2022c), ‘Supporting the Economy and Financial System in Response to COVID-19’, 29 January.

Suthakar A and M Garner (2021), ‘Developments in Banks' Funding Costs and Lending Rates’, RBA Bulletin, March.

How has Reserve Bank of Australia (RBA) contributed to the stability of the financial system

    Reserve bank of Australia, also known as the central bank of Australia. The RBA's principal responsibility is to oversee and protect the economy by implementing monetary policies, working to maintain a stable financial system, and issuing the country's currencies. This blog will look at how the Reserve Bank of Australia has aided the banking industry in sustaining a solid and stable financial system. According to the Reserve Bank of Australia corporate plan (2022), the measures and targets are; work with international bodies to address systematic risk, assess and communicate risk affecting the financial system and ensuring a stable financial system that support the growth of the economy. The risks of climate change and crypto-asset will be considered as determine ways the reserve bank helps to stabilize these risks to financial system.

The Risks Posed by Climate Change to The Financial System

Climate change has been seeming to be a massive issue to the world. It also poses risk such as financial, transition and physical risks to the banking sector (Baranović Busies, Coussens, Grill & Hempell, 2021). The three ways by which the Reserve Bank of Australia contribute to the stability of the financial system is to;

1. Communicate and ensure understanding of the effect of the risks to banks (RBA, 2022)
2. Increasing the standards for disclosure and management of climate-related risks by banks (RBA, 2022)
3. Considering climate-related risks in regulatory policy and capital frameworks (RBA, 2022)

In the pursuit of achieving these goals, The RBA participated with various bodies such as;

1. Participation in the CFR Climate Working Group
2. Participation with the Australian Prudential Regulation Authority (APRA) 
3. RBA served as chair of the Monetary and Financial Stability Committee (MFSC), an executive meeting of East Asia Pacific Central Banks (EMEAP), which explored the effects of climate change on monetary policy and financial stability.
4. RBA is a member of the Basel Committee on Banking Supervision (BCBS), which published a set of guidelines for banks' management and oversight of financial risks connected to climate change.
5.  RBA is a member of the NFGS, which is a global leader in the production of shared climate scenarios.
6. RBA in 2022, decrease its carbon emission by 70.4 tonnes which is equivalent to 6,652 trees.
7. Lastly, RBA is a member of the Network for Greening the Financial System.

The Risks Posed by Crypto-Asset to The Financial System

    There has been a significant increase in stablecoins (RBA, 2022). Stablecoins provide a quicker and less expensive alternative to payment processing and foreign transfers, becoming the first use for digital assets in the real world. In crypto-asset markets, stablecoins are frequently used to enable lending, borrowing, and trading (RBA, 2022).

The Rise in Stablecoins

Despite the rise in stablecoins as shown in the diagram above, Banks face a number of risks as a result of their connection with crypto-assets, such as credit, liquidity, operational risk, settlement risks and huge losses to investors, customers, banks and merchants (Kearns, 2021). In respect to these risks and its bad effect on the financial stability of the Australian economy. RBA, alongside domestic governments, and international organisations are all working hard to understand the financial stability risks posed by the crypto-asset, as well as the need for regulatory changes. Actions taken to mitigate these risks include;

1. Stablecoins are being incorporated into the proposed regulatory framework for stored-value facilities to reflect their similar risks.
2. The Financial Stability Board is presently seeking feedback on changes to a set of ten high-level suggestions for regulating global stablecoins and stablecoins having the potential to become global stablecoins (FSB 2022).
3. In an effort to strengthen consumer safeguards for crypto-assets, regulators are focusing on operators of the crypto market, such exchanges and lending platforms, who may be using deceptive or fraudulent advertising.
4.  Regulator are striving to make sure that crypto operations follow the law as it now stands.

Conclusion

A stable financial system is supposed to be strong and prepared to assist the economy during a time when companies will face greater risks. This blog considers the impact of RBA and on the stability of the financial system in Australia. Two risks were considered namely climate change risk and the crypto-assets risks. Climate change and crypto-assets risks represent a major challenge to the financial system. In the course of assessing these risks, we found various ways RBA alongside partnership with domestic and international bodies manage these risks. However, risks like climate change as still in its early stage and there is a need for all financial institutions to continue to investing in ways to fully assess, understand and manage these risks posed by climate change.

References 

Baranović, I., Busies, I., Coussens, W., Grill, M. and Hempell, H.S., 2021. The challenge of capturing climate risks in the banking regulatory framework: is there a need for a macroprudential response? Macroprudential Bulletin, 15.

CFR Working Group on Financial Implications of Climate Change (2021), ‘Council of Financial Regulators: Climate Change Activity Stocktake 2021’, September. Available at <https://www.cfr.gov.au/publications/policy-statements-and-other-reports/2021/council-of-financial-regulators-climate-change-activity-stocktake-2021/>.

Dark, C., Emery, D., Ma, J. and Noone, C., 2019. Cryptocurrency: Ten years on. Reserve Bank of Australia Bulletin.

Daubanes, J. and Rochet, J.C., 2021, June. Green finance and climate policy. In Energy, COVID, and Climate Change, 1st IAEE Online Conference, June 7-9, 2021. International Association for Energy Economics.

Kearns J (2021), ‘Evolving Bank and Systemic Risk’, Speech at the 34th Australasian Finance and Banking Conference, 16 December

Hermans, L., Ianiro, A., Kochanska, U., Törmälehto, V.M., van der Kraaij, A. and Simón, J.M.V., 2022. Decrypting financial stability risks in crypto-asset markets. Financial Stability Review, 1.

RBA 2022. Box A: Australian Financial Regulators’ Box A: International Banks' Response to Climate Risk, Financial Stability Review, April.

RBA 2022. Box A: Australian Financial Regulators’ Actions on Climate Change-related Risks’, Financial Stability Review, October.

Yi Gang 2021. Green Finance and Climate Policy’, Opening Remarks at a High-Level Seminar on Green Finance and Climate Policy, 15 April

Yi Gang 2021. Central Banks and Climate Change: How to Manage Expectations, Balance Actions and Communication and Contribute to Coordinate with Other Important Actors?’, Concluding Panel Speaker at the Green Swan Conference, 4 June.