SYDNEY, Nov 26 (Reuters) – A senior Australian central banker said on Wednesday the country’s financial conditions were influenced by global factors, with low equity risk premia and credit spreads suggesting conditions may be easier than otherwise.
In a speech in Sydney, Penelope Smith, head of international department at the Reserve Bank of Australia, said the cash rate is not the only influence on the cost of finance in Australia, but the extent of impact from international developments was highly uncertain.
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The structure of the financial system, which is dominated by banks, could mean the developments in capital markets are less important for financial conditions than in other economies like the United States, Smith said.
“There is a lot of uncertainty about where neutral rates are and where they are going. What we can perhaps conclude, though, is that they have not fallen since the pandemic and may have even risen,” she added.
KEY DETAILS
- Smith also gave a review of international markets over the past year. She said there is little evidence of a significant reallocation away from U.S. dollar assets but some market participants are looking to manage increased risks around the U.S. dollar.
- She said central banks in emerging markets have been increasing the share of gold in their reserves since Russia’s reserves were frozen in 2022 after the Ukraine war and this trend may have further to run.
- In conclusion, there is a need to be prepared for potential episodes of volatility and market dislocation, she said.
CONTEXT:
- The RBA has cut interest rates three times this year to 3.6% but an inflation surge in the third quarter has fuelled expectations that financial conditions are no longer restrictive. Financial markets imply less than a 50% probability that the RBA could deliver one last cut in May next year.
- The key question facing the RBA is about where the neutral rate is – a level of interest rates that either stimulates or drags on the economy. The estimates are wide-ranging but the RBA is hoping monetary policy remains slightly restrictive to bring inflation back to the 2-3% target band.
Reporting by Stella Qiu; Editing by Lincoln Feast
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