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.