Australia’s central bank says bank stress just one consideration for rate policy

SYDNEY  – A top Australian central banker on Monday said stress in the global banking system was mainly confined to a small number of poorly managed banks and was just one of many considerations for domestic monetary policy.

Asked whether the stress argued for a pause in rate rises, Reserve Bank of Australia (RBA) Assistant Governor Christopher Kent said the Board would consider financial conditions at its next policy meeting in April, but that was just one of many factors.

“The Board will be taking account of financial conditions, as they do all the time,” said Kent. “It’s a few institutions that were poorly managed.”

The central bank has said higher rates would likely be needed to bring inflation down, but markets are wagering the strains in global banking mean the RBA’s 10-month tightening campaign is essentially over.

Kent said the RBA was not involved in the dollar liquidity operations announced by the Federal Reserve and several other major central banks on Sunday, but that he had been in touch with his counterparts abroad.

Kent said the global banking system was in better shape than it had been during the global financial crises.

Earlier in a speech, Kent said the Australian banking system was “unquestionably strong” with capital levels well above those required by regulations.

Speaking on the lags in monetary policy, Kent also said the full impact of increases in interest rates was taking longer to filter through to the economy due to a higher share of fixed-rate mortgages and the savings amassed by households during the pandemic.

“This means that it’s likely to take longer than usual to see the full effect of higher interest rates on household cash flows and household spending,” said Kent.

“The Bank will continue to closely monitor the transmission of monetary policy and its impact on household spending, the labor market and inflation,” he added. “The Board will respond as necessary to bring inflation back to target in a reasonable time.”

The central bank has lifted cash rates 10 times since last May, taking them to a decade-high of 3.6 percent.

Kent noted the stress in the global financial system but played down the impact on local banks.

“Volatility in Australian financial markets has picked up but markets are still functioning and, most importantly, Australian banks are unquestionably strong – the banks’ capital and liquidity positions are well above regulatory requirements,” he said.

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