The Australian Dollar is under pressure on Friday following the release of the Reserve Bank’s (RBA) Financial Stability Review. The RBA said increased risk-taking by optimistic borrowers could lead to a build-up of risks in the housing market, even if the banks maintained lending discipline.
In the semi-annual check of the financial system, the Reserve Bank downplayed the threat of rapidly rising house prices to financial stability, saying it had not been accompanied by a build-up in debt.
Services sector activity hits 2½-year high
Reserve Bank Financial Stability Review; Services gauge; China data
Reserve Bank Financial Stability Review: The Reserve Bank notes: “housing price growth (and to a lesser extent housing borrowing) has picked up notably in recent months and is being watched closely by regulatory authorities.”
The Financial Stability Review has implications for finance providers, the broader share market, and interest rate settings. The services purchasing managers index guides conditions in retailing, financial services, and the services sector more broadly. The Chinese data have implications for the currency markets and therefore exporters and importers.
What does it all mean?
• The Reserve Bank has book-ended an Easter holiday-shortened week with the release of its semi-annual Financial Stability Review (FSR) today, having already handed down its monetary policy decision on Tuesday. While policymaker’s left monetary policy unchanged at the meeting – reaffirming that the Board does not expect the conditions (i.e. lower unemployment and higher wages) that would require lifting the cash rate target to be met until “2024 at the earliest” – attention quickly turned today’s FSR.
• Australia’s growth engine – the services sector – is in good shape with activity the strongest in over 2½ years in March following last year’s pandemic shock. Importantly, available capacity being utilized across the services sector is back at pre-pandemic levels at 82.4 percent, which bodes well for hiring and investment intentions. While conditions and confidence in the services sector have improved with an easing of government restrictions, supply disruptions and rising freight costs continue to increase input costs for business owners. But businesses have reported passing these costs on to consumers – amid stronger demand – with selling prices the highest in 13 years.
• While financial stability risks presented by high unemployment have eased somewhat, the expiry of the JobKeeper wage subsidy and a potential increase in business insolvencies – as government bankruptcy-related moratoriums are wound back – were also key focuses of the FSR. In fact, policymakers said, “As of February 2021, the share of businesses still receiving JobKeeper payments was highest in Melbourne and areas with a relatively high share of businesses operating in sectors more affected by the pandemic.” And, “If some businesses have trouble making their payments, this would spill over to other businesses through trade credit networks. Overall, the risks of insolvency appear largest for SMEs operating in high-risk industries, given they tend to have smaller cash buffers and have been more reliant on temporary support measures than larger firms. Looking ahead, it is likely that insolvencies will rise further for some months, notwithstanding the expected improvement in aggregate economic conditions. Vulnerable businesses may find it difficult to continue to operate and/or to meet their debt repayments if their revenues do not increase sufficiently to cover the withdrawal of government support.”
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