Michelle Bullock, deputy governor of the Reserve Bank of Australia (RBA), has shed further light on the central bank’s decision to pause its monetary policy tightening cycle after 10 consecutive hikes totalling a cumulative 350 bps.
Speaking on a panel hosted by the Western Economic Association International (WEAI) in Melbourne on Wednesday (12 April), Ms Bullock said a rate pause was “always on the cards”, stressing that banking volatility in the US and Europe — headlined by the collapse of Silicon Valley Bank — did not force the central RBA’s hand.
“We had already suggested that we were thinking about pausing because we’d moved 350 basis points, 3.5 percentage points, in quick time,” she said.
“…In other tightening cycles, we typically move a bit and then we stop and watch [but] we had to get from emergency low levels, remove all that stimulus and get into restrictive territory.
Ms Bullock went on to add that the RBA’s counterparts in the US and Europe continued to hike rates despite banking instability in their own backyards.
“The Federal Reserve is not increasing as quickly because of the financial stability concerns. It’s saying they’re taking into account the fact that financial conditions have tightened, and therefore, they have to maybe do a little bit less,” she said.
Following the April monetary policy board meeting, RBA governor Philip Lowe said the board decided to provide “additional time” to assess the impact of 3.5 per cent in cumulative increases to the cash rate since the central bank commenced its tightening cycle in May 2022.
“The board recognises that monetary policy operates with a lag and that the full effect of this substantial increase in interest rates is yet to be felt,” he said.
Governor Lowe acknowledged global inflation “remains very high”, but said in Australia, the latest data suggests inflation has peaked and growth has slowed.
However, the statement did make specific mention of recent market volatility in response to banking collapses in the United States and the demise of Swiss lender Credit Suisse.
Australian banks better placed
Deputy governor Bullock also weighed in on the cause of banking failures in the US and Europe, claiming they were not particularly unique to current global financial conditions.
“The US has bank failures on a regular basis,” she said.
“They have lots and lots of banks, thousands of them, and some of the smaller ones are failing all the time.”
Drawing on the circumstances surrounding the collapse of Silicon Valley Bank, Ms Bullock flagged disproportionate exposure to bonds with unrealised losses, and concentrated deposit bases with large volumes from a small pool of depositors.
These conditions were exposed by rapid deposit runs, which Ms Bullock said were historically unprecedented.
Echoing remarks from John Lonsdale, chair of the Australian Prudential Regulation Authority (APRA), Ms Bullock said Australia’s banks are unlikely to suffer the same fate, given they are subject to strict prudential standards.
Last month, Mr Lonsdale revealed findings from a recent stress test of 10 systemically important Australian banks.
Under the scenario, banks were subject to a “deep and prolonged global economic downturn” underpinned by rising interest rates and “prolonged inflationary pressures exacerbated by energy supply shocks”.
GDP fell 4 per cent, unemployment surged to 11 per cent, and national home values plunged 43 per cent over three years.
This resulted in sovereign and bank debt ratings downgrades, a temporary closure of offshore funding markets, a sell-off in the Australian dollar, and a widening in credit spreads.
Additionally, each of the 10 banks were hit with a “major and costly cyber attack”, with APRA also assuming no mitigating actions to absorb the shock.
All 10 of the banks experienced significant credit losses under this scenario, with profits falling sharply and slashing investor dividends.
However, the banks remained above minimum capital requirements, retained sound funding and liquidity positions, and kept deposits “safe”.
Mr Lonsdale lauded the regulatory standards imposed on Australian banks, including capital requirements modelled on the Basel III framework.
“APRA talks about three levels of alignment to Basel: sub-equivalent, equivalent, and super-equivalent. And in a number of important areas, APRA’s prudential framework is super-equivalent, meaning it goes above and beyond the minimum Basel requirements,” he said.
This includes incorporating recommendations from the 2014 Financial System Inquiry for “unquestionably strong” capital requirements, with Lonsdale claiming these reforms have put Australian banks in the “top quartile of the international pack”.
The APRA chair also pointed to stricter risk-weighting requirements for the local sector, given it has a “particular concentration risk in residential mortgage lending”; and “narrower range of definitions” of high-quality liquid assets (HQLA) when determining the liquidity coverage ratio (LCR).
Notably, Mr Lonsdale said Australia is the only jurisdiction to require banks to hold capital to offset risks associated with higher interest rates — interest rate risk in the banking book (IRRBB) standards.