June 2019

Australian Economy Two IT experts look at a set of monitors displaying data
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The Framework for Monetary Policy Implementation in Australia

Domestic Markets Department

The Reserve Bank of Australia's domestic market operations are designed to ensure that the cash rate is consistent with the target set by the Reserve Bank Board. The most important tools to guide the cash rate to the target are the interest rate corridor and daily transactions to manage liquidity in the interbank overnight cash market. The RBA also ensures that there is sufficient liquidity in the cash market for it to function smoothly. This article provides an overview of the RBA's operational framework for implementing monetary policy.

monetary policy, cash rate, market operations
Payments The hands of a woman holding a purse and a credit card
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Cash Withdrawal Symptoms

Luc Delaney, Aidan O'Hara and Richard Finlay

Most Australians don't have to travel more than a few kilometres to deposit or withdraw cash. Cash use is declining, however, and with it the number of ATMs and other cash access points. This trend seems likely to continue. While it will probably have relatively little impact on those living in metropolitan areas, it is important that reasonable access to cash services is maintained for people in regional or remote locations as long as such access is needed.

banknotes, currency, banking, atm
Payments A young woman looks out across the water towards an illuminated city skyline.
Photo: SammyVision – Getty Images

Bank Fees in Australia

Susan Black, Dmitry Titkov and Lydia Wang

The Reserve Bank has conducted a survey on bank fees each year since 1997. Banks' overall income from fees was little changed in 2018. The removal of ATM withdrawal fees by a number of banks reduced total fees charged to households. However, this was largely offset by the continued increase in fee income from small businesses, reflecting strong growth in credit card and debit card transactions.

atm, banking, fees
Financial Stability A puzzle showing flags of the G20 countries
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A Decade of Post-crisis G20 Financial Sector Reforms

Mustafa Yuksel

The global financial crisis resulted in significant disruption to markets, financial systems and economies. It also led to comprehensive reform of the financial sector by the G20 group of countries. After a decade of policy design and implementation, standards in the global financial system and regulatory approaches in many countries have changed substantially to improve financial system resilience. Australia, as a G20 member, has been active in implementing these reforms. This article looks at the main financial sector reforms developed in the immediate post-crisis period, their implementation in Australia and the more recent shift in international bodies' focus to assessing whether these reforms have met their intended objectives.

financial stability, reforms
Australian Economy Workers during peak hour are crowding a pedestrian zone
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Wages Growth by Pay-setting Method

James Bishop and Natasha Cassidy

Using job-level micro data, we show that the dynamics of wages growth differ across pay-setting methods. In recent years, wages growth has been strongest for award-reliant workers, stable at low levels for those on enterprise bargaining agreements (EBAs), and low but rising for those on individual arrangements. These trends reflect differences in the arrangements governing each pay-setting method, and differences in the types of workers covered by them. For instance, individual agreements react most flexibly to changes in labour market spare capacity, while government policies have kept public sector wages growth in EBAs relatively unchanged of late. This new disaggregation of wages growth allows for an estimation of the pass-through of award wage increases to other wage outcomes in the economy. We also find that the new breakdown provides a useful framework for forecasting aggregate wages growth.

wages, payments, employment
Global Economy Early morning mood at a maritime container loading facility
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Spillovers to Australia from the Chinese Economy

Rochelle Guttmann, Kate Hickie, Peter Rickards and Ivan Roberts

China is Australia's largest trading partner. The strong links between the two economies raises the question of how a sizeable slowdown in Chinese activity would affect Australia. Through our research we have attempted to quantify how such a scenario could play out and its implications. We consider the main transmission channels, notably trade and financial market effects, and describe possible scenarios that could lead to a material slowing in China. We apply a stylised shock encapsulating features of these scenarios to a medium-sized macroeconometric model of the Australian economy and analyse how the shock is transmitted through real and financial channels. The potential for the exchange rate and monetary policy to offset some of those effects is also examined.

china, modelling, trade
Australian Economy The hands of a cashier retrieve banknotes from a till
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Competition and Profit Margins in the Retail Trade Sector

Matthew Carter

Net profit margins have declined for both food and non-food retailers over recent years. This has been driven by a decline in gross margins suggesting a reduction in firms' pricing power. This is consistent with information from the Reserve Bank's business liaison program about heightened competition in the retail trade sector. Liaison indicates that firms are seeking to offset the decline in margins through measures such as vertically integrating supply chains and adjusting product mixes. Retailers also report a push to reduce operating expenses such as rent and labour, though with mixed success.

retail, business, trade
Australian Economy Two construction cranes dominate the sky next to a mobile tower
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Can Structural Change Account for the Low Level of Non-mining Investment?

Jonathan Hambur and Keaton Jenner

No, it cannot. Non-mining firms have invested less over the past decade, relative to their output, than they did over the previous two decades, and this decline in investment intensity has been broad based across firms. This reduced investment could contribute to slower economic growth, if, for example, it is associated with decreased adoption of new technologies. This article looks into potential driving forces behind the decline in the rate of investment, finding that it cannot be explained by shifts in industry structure, or the composition of firms by age or date of formation. The size of the decline is consistent with what would be expected given slower technological progress and lower depreciation rates. But there might be other, more cyclical reasons for the observed slowdown in non-mining investment.

business services, investment, non-mining
Australian Economy Three employees work on large charts stuck to a transparent wall
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Explaining Low Inflation Using Models

Natasha Cassidy, Ewan Rankin, Mike Read and Claudia Seibold

The Reserve Bank's inflation forecast models can help assess which factors have contributed most to low inflation over recent years. The models find that spare capacity in the economy and the associated low wages growth can account for much of recent low inflation outcomes. This article outlines the inflation forecast models used at the Bank, and looks at the recent performance of the Bank's inflation forecasts.

modelling, inflation, labour market, wages, forecasting
Finance Old sandstone buildings stand out against glass skyscrapbers in the background
Photo: Karin de Mamiel – Getty Images

The Australian Equity Market over the Past Century

Thomas Mathews

This article describes developments in the Australian equity market over the past century, drawing in part from a newly compiled historical dataset which begins in 1917. Over the past one hundred years, the market has increased in size relative to the economy, while its composition by industry also changed substantially. The data also provide new evidence that historical returns on Australian equities – and therefore the equity risk premium – are lower than previously thought.

finance, markets, financial instruments
Global Economy The illumniated skyline of a metropolitan city merges with digital displays showing charts and numbers
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China's Local Government Bond Market

Alex Holmes and David Lancaster

China's local government bond market is a key source of financing for local governments, particularly to fund infrastructure investment. The market has grown rapidly in recent years but is still relatively illiquid and has a narrow investor base. It also shows little difference in pricing of credit risk across different bond types and issuers, partly due to the perception that local governments enjoy an implicit guarantee from the central authorities. The Chinese Government has implemented measures to foster the development of these features of the market, bearing in mind risks to financial stability.

china, bonds, financial instruments
Payments The symbol of Bitcoin is juxtaposed to an electronic circuit board
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Cryptocurrency: Ten Years On

Cameron Dark, David Emery, June Ma and Clare Noone

Ten years on from the creation of Bitcoin, the term ‘cryptocurrency' has entered the public consciousness. Despite achieving some name recognition, cryptocurrencies are not widely used for payments. This article examines why Bitcoin is unlikely to become a ubiquitous payment method in Australia, and summarises how subsequent cryptocurrencies have sought to address some of the shortcomings of Bitcoin – such as its volatility and scalability problems. It also examines the proliferation of new ‘coins' and concludes that, despite the developments in cryptocurrencies, none are currently functioning as money in the economy.

cryptocurrency, currency, money, payments
Australian Economy A long mining train snakes its way through dry country
Photo: Gangliu Maogg Tatomm – Getty Images

Exploring the Supply and Demand Drivers of Commodity Prices

Michelle Cunningham and Emma Smith

Quantifying the relative importance of supply and demand in price movements of commodities can help inform how changes in these prices might impact the Australian economy, via exports, business investment and the exchange rate. Isolating the extent to which a change in commodity prices is driven by demand also provides a timely indicator of global economic activity. In this article, we use a dynamic factor model to help interpret changes in commodity prices as being driven by supply and/or demand developments. Results from the model are consistent with prior understanding of several notable episodes of commodity prices movements.

commodities, prices, modelling

The graphs in the Bulletin were generated using Mathematica.

ISSN 1837-7211 (Online)