Reserve Bank of Australia
Bulletin
Insights into the economy and financial system from teams throughout the Reserve Bank of Australia
March 2019
New Payments Insights from the Updated Retail Payments Statistics Collection
The Reserve Bank has significantly expanded the retail payments data that it publishes from 61 to around 300 series. This followed a project conducted in consultation with the industry to update the underlying statistical collection. The new data provide additional insights into Australians' payment behaviours, particularly in the context of the shift towards electronic methods of payment away from cash and cheques. This article discusses some of the new series being published by the Bank.
Developments in Banks' Funding Costs and Lending Rates
Banks' funding costs increased a little over 2018, driven by a rise in the cost of wholesale funding linked to money market rates, but with some offset from reductions in the cost of retail deposits. Most lenders passed the increase in funding costs through to their lending rates, including for mortgages. Nevertheless, funding costs and lending rates remain low by historical standards.
Updates to Australia's Financial Aggregates
The financial aggregates for Australia are important data compiled by the Reserve Bank that are used by policymakers to assess financial and economic activity of households and companies. From August 2019, the Reserve Bank will publish the financial aggregates using an improved framework based on a better data collection. This will enhance the quality of information available to policymakers and the wider community. This article gives an overview of the main changes.
Recent Trends in Banknote Counterfeiting
Law enforcement intervention has shut down several large counterfeiting operations and led to a decline in counterfeiting rates over the past couple of years. At the same time, the increased availability of low-cost, high-quality printing technology has meant that the quality of counterfeits has improved. This article discusses trends in banknote counterfeiting in Australia and the impact of counterfeiting on different stakeholders.
The Labour and Capital Shares of Income in Australia
In Australia, the share of total income paid to workers in wages and salaries (the ‘labour share’) rose over the 1960s and 1970s but has gradually declined since then. The corollary is that the share of income going to capital owners in profits (the ‘capital share’) has risen. The long-run increase in the capital share largely reflects higher returns accruing to owners of housing (primarily rents imputed to home owners, particularly before the 1990s) and financial institutions (since financial deregulation in the 1980s). Estimates of the capital share of the financial sector are affected by measurement issues, though structural factors, such as a high rate of investment in information technology, have reduced employment and increased capital in the sector.
Wealth and Consumption
Do households consume more when their wealth increases? Our research identifies a positive and stable relationship between household wealth and consumption, largely reflecting changes in spending on motor vehicles, durable goods and other discretionary spending. Increases in household wealth supported household spending between 2013 and 2017, when growth in disposable income was weak. Similarly, declines in household wealth typically weigh on consumption. However, a decline in household wealth is less likely to coincide with weaker consumption growth if it occurs at a time when the labour market is strong and household income growth is firm.
Firm-level Insights into Skills Shortages and Wages Growth
Despite increased reports of skills shortages from contacts in the RBA's regional and industry liaison program since 2016, national wages growth has picked up only a little and remains subdued. Information collected through the liaison program since the early 2000s suggests Australian firms use a range of practices in addition to, and sometimes before, increasing wages to address skills shortages. In the short run, this may constrain the effect of skills shortages on wages growth.
The International Trade in Services
Services are becoming increasingly traded globally and technological advances have led to the rise of more modern services such as communications, financial and intellectual property services. While advanced economies continue to account for the bulk of the demand and supply of services traded around the world, the emerging economies' share has been increasing. This article examines the changing global trends and compares them to Australia's experience with services trade, which has been shaped by China's growing demand.
Housing Policy and Economic Growth in China
Housing investment has contributed significantly to Chinese GDP growth in recent decades and, due to the steel-intensive nature of that investment, has also been an important driver of Australian exports of iron ore and metallurgical coal. Trends in Chinese residential investment have been strongly influenced by government policies. Since 2016, the Chinese Government has tightened policies, particularly towards ‘speculative’ housing purchases, to moderate property price inflation. It has simultaneously implemented targeted, incremental measures to improve longer-term housing supply. Even so, construction activity has weakened and prices have continued to rise rapidly. Maintaining this policy mix towards the sector is likely to prove challenging as downside risks to broader economic conditions mount.
Explainer: The Transmission of Monetary Policy
The transmission of monetary policy describes how changes made by the Reserve Bank to the cash rate – the ‘instrument’ of monetary policy – flow through to economic activity and inflation. This process is complex and there is a large degree of uncertainty about the timing and size of the impact on the economy. In simple terms, the transmission can be summarised in two stages. This explainer outlines these two stages and highlights some of the main channels through which monetary policy affects the Australian economy.
December 2018
Payment Surcharges: Economics, Regulation and Enforcement
The Reserve Bank's new rules on surcharging, which are enforced by the Australian Competition and Consumer Commission (ACCC), allow businesses to recover the cost of accepting different payment methods but prevent them from surcharging excessively. This article discusses the economic reasons for allowing businesses to surcharge, how the rules work to prevent excessive surcharging, the effect of these rules since their introduction, and how the ACCC enforces them.
Which Firms Get Credit? Evidence from Firm-level Data
To improve our understanding of how lenders assess firms' creditworthiness, this article relates the characteristics of firms to whether their applications for credit were approved. We find evidence to suggest that firms with relatively low profitability, high debt servicing burdens or limited credit histories were less likely to have their applications approved than other comparable firms. However, the decision to approve an application for credit also appears to be influenced by a range of other unmeasured factors, which possibly reflects the complexity of the approval process in practice.
Understanding Exchange Rates and Why They Are Important
Exchange rates are important to Australia's economy because they affect trade and financial flows between Australia and other countries. They also affect how the Reserve Bank conducts monetary policy. This article outlines how exchange rates are measured, the different types of exchange rate regimes, the factors that influence the exchange rate and how changes in the exchange rate affect the economy.
The Reserve Bank's Securitisation Dataset
The Reserve Bank's Securitisation Dataset contains timely and detailed data on each and every one of the mortgages underlying Australian residential mortgage-backed securities (RMBS). This dataset allows the Bank to better analyse the structure of, and monitor developments in, the mortgage market. In order to examine how representative the dataset is of the wider mortgage market we compare the dataset to less frequent but more comprehensive data from the Australian Prudential Regulation Authority (APRA). We find that the Securitisation Dataset provides excellent coverage of the collateral underpinning the RMBS market, and is representative of the wider Australian mortgage market across a number of dimensions. We then use these data to explore trends in mortgage interest rates.
China's Supply-side Structural Reform
Supply side structural reform is a key component of China's economic policy agenda. The motivation for reform is the view that the supply side of China's economy is out of balance with the demand side and requires adjustment. The reform targets the structure of production, to make it more efficient at the macro and firm level. As well as improving efficiency, firms are being pushed to make production more environmentally friendly. Promoting advanced industries and innovation in existing industries are also key features of the policy.
Understanding Demand for Australia's Banknotes
As the sole issuer of the nation's banknotes, the Reserve Bank knows how many banknotes it prints, issues to the public and destroys. However, much less is known about how these banknotes are used. This is particularly true for the $50 and $100 banknotes, which, by value, account for more than 90 per cent of banknotes on issue. To help address this, we describe in this article the various components of Australian cash demand and use a range of techniques to estimate how much each category contributes to total demand. Our key findings include that non-transactional demand for cash (e.g. hoarding for store-of-value purposes) has likely been the driving force of recent growth in the value of outstanding banknotes, and that a small but non-trivial portion of cash demand comes from the shadow economy.
Developments in Emerging South-East Asia
A number of economies in South-East Asia have been making significant progress in their economic development. This article focuses on the largest middle-income economies in South-East Asia: Indonesia, Malaysia, Thailand, the Philippines and Vietnam. We examine the developments in these economies over recent decades, explore their relationship with Australia and the global economy and consider their potential to reach a significantly higher level of income. These economies have benefited from favourable demographics over recent decades although some will face pressures from ageing populations. However, there are ample opportunities to gain from further improvement in infrastructure, education and labour force participation.
Business Concentration and Mark-ups in the Retail Trade Sector
The share of industry sales accounted for by the largest Australian businesses (or ‘business concentration’) has gradually risen since the start of this century. This increase in concentration has been mainly driven by the retail trade sector, particularly in recent years. In contrast, estimates of the ratio of retail prices to marginal cost (or ‘mark-ups’) rose over the 2000s but have declined in recent years. Taken together, the evidence suggests that the retail trade sector has become more competitive in recent times, following a period of declining competition through the 2000s.
A Forward-looking Model of the Australian Dollar
The exchange rate is an important mechanism that helps the economy adjust to external shocks.This article analyses the key determinants of the Australian dollar – the terms of trade and differences between interest rates in Australia and other advanced economies. It emphasises that ‘forward-looking’ measures of these determinants are important for capturing movements of the observed real exchange rate. In particular, they capture longer-term movements in the real exchange rate, including around key turning points, for instance during the global financial crisis.
September 2018
The New Payments Platform and Fast Settlement Service
A significant advance in the Australian payments system occurred in February 2018 with the public launch of the New Payments Platform (NPP). The NPP enables customers of financial institutions to make immediate payments 24 hours a day, every day of the week (‘24/7’). In conjunction with the development of the NPP, the Reserve Bank developed new infrastructure, the Fast Settlement Service (FSS), which provides for settlement of NPP transactions between financial institutions on a 24/7 basis across their Exchange Settlement Accounts (ESAs) at the Reserve Bank. These new systems have brought fast payment services to Australians in line with similar initiatives that have been undertaken or are underway internationally. The initial adoption of the NPP has been gradual, reflecting the staged introduction of services by financial institutions, as well as the time taken for customers to assess and adjust to the new services being offered.
Access to Small Business Finance
The Reserve Bank has conducted additional outreach this year to hear a broad range of perspectives on small business finance. Many small businesses looking to grow still find it challenging to access finance, particularly without providing real estate as security. Lenders highlight that they are keen to lend to small businesses, but that unsecured finance involves more risk. This article considers these issues and outlines some initiatives market participants have suggested that could help to improve access to finance for small businesses.
Does It Pay to Study Economics?
Economics graduates work in a broad range of occupations and industries, often beyond the discipline of economics itself. The earnings of economics graduates are higher than in most other fields of study, including business studies. By estimating wage premiums for various skills, we assert that the comparatively strong earnings of economics graduates comes from the development of analytical thinking and quantitative skills which are highly rewarded in the labour market.
The Effect of Minimum Wage Increases on Wages, Hours Worked and Job Loss
Australia has a detailed system of ‘awards’ that specify different minimum wages depending on the industry, location and skill of an employee. I find that legislated adjustments to award wages in Australia between 1998 and 2008 were almost fully passed on to wages in award-reliant jobs. There is no evidence that modest, incremental increases in award wages had an adverse effect on hours worked or the job destruction rate.
Money in the Australian Economy
Money forms part of our everyday lives and is integral to the smooth functioning of the financial system and the real economy; however, discussions of what money is and how it is created are generally left to economics textbooks. This article provides an introduction to the concept of money and describes how it is created and measured. We also discuss what these measures can tell us about economic activity.
Firm-level Insights into IT Use
Firms in Australia have used advances in information and communication technology (IT) to become more productive, reduce costs, and improve their understanding of customers. The rate at which new technology has been adopted by firms differs greatly, as do the benefits from using IT. The way firms are using IT can help to explain trends in the broader economy. Firms' expenditure on computer software has grown faster than other forms of investment. The adoption of new technology is also changing the composition of jobs in the economy.
The Cyclical Behaviour of Labour Force Participation
When economic conditions improve, more people enter the labour force. Understanding the nature of this cyclical relationship between participation and economic activity is important for determining the amount of slack in the labour market and predicting how the economy will respond to changes in economic conditions. The participation rates of young people, 25–54-year-old females and older males are the most responsive to changes in economic conditions. If the participation rate did not adjust, expansions would be more inflationary, while recessions would be more disinflationary and lead to larger increases in involuntary unemployment.
Financial Stability Risks and Retailing
Discretionary goods retailers are facing a challenging environment of increased competition, slow growth in consumer spending and changing consumer preferences. Despite this, these retailers generally appear to be in good financial health and there are many new shopping centres and refurbishments in the pipeline. Banks are active in funding these developments, and are increasing their exposure to retail commercial property, although they are reducing their exposure to retail businesses. If these new developments fail to attract sufficient customer spending, retailers may find themselves unable to pay rent to landlords who have taken on additional debt, and this could lead to losses at banks.
Interest Rate Benchmarks for the Australian Dollar
Interest rate benchmarks are widely relied upon in global financial markets. They are referenced in contracts for derivatives, loans and securities. They are also used by market participants to value financial instruments, and by investment funds as benchmarks for assessing their performance. The key interest rate benchmarks for the Australian dollar are the bank bill swap rates (BBSW) and the cash rate. This article provides an overview of these benchmarks, and the reforms that have been undertaken over recent years to make them more robust.
RMB Internationalisation: Where to Next?
China's push to make its own currency – the renminbi (RMB) – available for use by non-residents was a catalyst for important reforms. Since the RMB internationalisation policy began in 2009, not only is the RMB now in greater use internationally, capital flows more freely across China's borders, the exchange rate is more flexible and domestic interest rates are more market determined. In time, the RMB could emerge as a widely used regional currency in Asia.
Explainer: Unemployment
The unemployment rate is the most commonly used indicator for understanding conditions in the labour market. The labour market is the term used by economists when talking about the supply of labour (from households) and demand for labour (by businesses and other organisations). The unemployment rate can also provide insights into how the economy is performing more generally, making it an important factor in thinking about monetary policy.
June 2018
Private Non-mining Investment in Australia
While mining investment has risen in importance over recent decades, the non-mining investment share of output has fallen. This article explores some of the factors that have contributed to the downward trend in the non-mining investment share over time. The article finds that the future non-mining investment share could be around 1–2 percentage points lower on average than it was in the two decades before the financial crisis.
Labour Market Outcomes for Younger People
Monitoring developments in the labour market for younger people is important, because they make up a large share of unemployment in the economy, and because early-career labour market outcomes can affect future outcomes. This article outlines the demand and supply factors that have affected 15–24 year old workers in Australia. In particular, we analyse the factors affecting their participation in the labour force, such as increased education attainment. We also show how younger workers are more adversely affected than the rest of the population when economic conditions slow. Over the past decade, increases in the unemployment and underemployment rates for younger people have been over twice as large as for the overall labour market. The share of 20–24 year olds that have become disengaged from either study or work has also increased.
Indicators of Labour Market Conditions in Advanced Economies
While the unemployment rate is the most widely used indicator of labour market slack, there are many other measures. This article reports on what a broad range of indicators say about conditions in the labour markets of advanced economies. We summarise the various indicators using a standard statistical technique. The summary measures show labour markets in most advanced economies are tight, although in some cases not as tight as implied by the unemployment rate. The Australian labour market has spare capacity remaining, consistent with readings from the unemployment rate. The summary measures provide additional information about wage developments for most advanced economies, above and beyond the unemployment rate, but do not fully account for the weak wages growth of recent years.
Economic Trends in India
The Indian economy has experienced a notable turnaround in recent years. Growth has rebounded, inflation has moderated, and the budget and trade deficits have narrowed. The Indian Government has also initiated policies and reforms aimed at encouraging investment, strengthening productivity and ensuring fiscal sustainability. Stronger growth in domestic demand has led to a recovery in India's imports, including from Australia. The recent volatility in foreign exchange markets and the recovery in oil prices pose upside risks to inflation and the current account deficit. However, India's strong long-term potential for growth, driven by demographics, urbanisation and productivity-enhancing reforms, suggests there is scope for trade between Australia and India to expand further in coming years.
Banking Fees in Australia
The Reserve Bank has conducted a survey on bank fees each year since 1997. The most recent survey suggests that banks' fee income from both households and businesses rose in 2017, due to a combination of growth in the volume of services for which fees are charged and higher unit fees on some products. Deposit fee income continued to decline relative to the value of outstanding deposits, while lending fee income as a share of assets was steady. Greater use of electronic payment methods continued to support strong growth in merchant service fee income
Developments in Correspondent Banking in the South Pacific
This article examines the withdrawal of global financial institutions from providing correspondent banking services to the South Pacific region and the implications for remittances. Disruptions to the flow of remittances, an important source of income to many low-income island nations, could limit local consumption and adversely affect economic stability. So far, however, remittances to the South Pacific region have continued to increase.
Trends in China's Capital Account
Chinese policymakers' approach to liberalising capital flows has been gradual and controlled over time, as the authorities have sought to mitigate volatility in the Chinese renminbi (RMB) and private capital flows. Direct investment flows out of China have grown, become more diversified and have increasingly been accounted for by private investors. Banking-related flows have proved more volatile and are correlated with expectations for the RMB.
The Australian OTC Derivatives Market: Insights from New Trade Repository Data
Over-the-counter (OTC) derivatives have played a significant role in episodes of financial stress, including the global financial crisis. However, because these derivatives are not traded on exchanges, detailed information about them has not generally been available. Newly available trade-level data coming from trade repositories can now facilitate a closer look at these markets than was possible before. This article focusses on OTC interest rate derivatives. Central counterparties (CCPs) have become much more important, in large part because of G20 reforms to increase the central clearing of OTC derivatives. Nonetheless, Australian banks still have significant exposures to other counterparties, including foreign banks. In aggregate, Australian banks hold a variety of offsetting single-currency interest rate derivatives, and use cross-currency swaps to hedge exchange rate risks.
March 2018
Meet MARTIN, the RBA's New Macroeconomic Model
The Reserve Bank has begun using a new full-system macroeconomic model called MARTIN in policy analysis and forecasting. It is designed to be used as part of the Bank's existing processes for forecasting and analysis that use a range of information, models and staff assessments. MARTIN is already being used in these processes to help understand economic developments and quantify risks, and in time it will be used to extend forecasts beyond the usual two-to-three-year horizon.
Mining Investment Beyond the Boom
The construction phase of Australia's mining boom is now almost complete. In this article, we use two complementary approaches to investigate what mining investment might look like look over the next decade or so. The first approach explores the long-run determinants of mining investment and its likely long-run share of GDP. We then take a bottom-up approach, focusing on the amount of investment that will be required to maintain firms' existing productive capacity; in this approach we focus on Australia's three major commodities (coal, iron ore and liquefied natural gas). The analysis suggests that mining investment will likely make up a larger share of GDP than it did before the boom, and that it will continue to play an important role in driving movements in Australia's economic activity.
Structural Change in the Australian Economy
The structure of the Australian economy has changed significantly over the past 50 years. Services have become an increasingly important part of the economy. Supply chains have lengthened as traditional goods-producing industries have become more specialised in their core activities and outsourced their non-core activities to the business services sector. These developments have had significant implications for the composition of employment and the skill requirements of the Australian labour force.
Perceptions of Job Security in Australia
A concern that low job security is constraining wage growth has been expressed in many countries. Using data on Australian households over time, this article finds that workers' perceptions of their own job security have declined in recent years. This deterioration has occurred across many job and personal characteristics. These weaker job security perceptions have provided a small drag on wage growth.
Wage Growth in Advanced Economies
Nominal wage growth in advanced economies has been sluggish, despite unemployment in a number of places falling to levels consistent with full employment. This article finds that, in most economies, low wage growth does not reflect a weaker relationship with unemployment. Instead, lower productivity growth, the difficulty of cutting wages following the global financial crisis and a decline in labour's bargaining power help explain some of the wage sluggishness. There also appears to be a common, but yet unidentified, factor that has weighed on wages over the past two years.
Developments in Banks' Funding Costs and Lending Rates
This article updates previous Reserve Bank research on the composition and pricing of banks' debt funding and lending rates. The major banks' debt funding costs declined a little over 2017, primarily driven by a decline in the cost of deposits. Over the same period, overall lending rates were little changed, with higher household lending rates partly offset by lower business lending rates.
The Distribution of Mortgage Rates
Mortgage interest rates can vary considerably across borrowers and are typically less than the standard variable rates (SVRs) advertised by banks. This article uses loan-level data to explore the relationships between interest rates and the characteristics of borrowers and their loans. Mortgages with riskier characteristics tend to have higher interest rates. Discounts applied to SVRs have tended to increase over recent years, and are also influenced by the type of loan and its size.
Non-bank Financing in China
The rise of shadow banking activities over the past decade has provided a range of benefits to the Chinese economy and financial system. Yet, it has also raised considerable financial stability risks, prompting Chinese authorities to announce many changes to the regulatory and supervisory framework. This Bulletin article examines the nature and complexity of shadow banking and highlights the challenges facing the Chinese authorities.
High-denomination Banknotes in Circulation: A Cross-country Analysis
In Australia, Canada and the United Kingdom, the number of high-denomination banknotes in circulation has increased at an above-trend rate in recent years. Evidence suggests that overseas demand might be a common driver of this elevated growth. Increased domestic demand for both transaction and store-of-value purposes may also have contributed, as well as responses to changes in government and central bank policies. This research was undertaken with assistance from members of the Four Nations Distribution Working Group, in line with the group's objective to explore banknote-related topics that are directly relevant to the member central banks.
Explainer: Australia's Inflation Target
The Bank is committed to supporting economics educators and students and we have been developing a suite of education resources and learning experiences. The resources include an ‘Explainer’ series which provides explanations about key economic concepts, the Australian economy and the role of the Bank. This Explainer looks at Australia's inflation target, why the Bank targets inflation and how the target works. While the Explainers are generally aligned with curricula for senior high school students, they are suitable for a range of audiences.
The graphs in the Bulletin were generated using Mathematica.
ISSN 1837-7211 (Online)