RBNZ Official Cash Rate unchanged at 1.75 percent

The Reserve Bank today left the Official Cash Rate (OCR) unchanged at 1.75 percent.

The outlook for global growth continues to gradually improve.  While global inflation remains subdued, there are some signs of emerging pressures. Commodity prices have continued to increase and agricultural prices are picking up.  Equity markets have been strong, although volatility has increased.  Monetary policy remains easy in the advanced economies but is gradually becoming less stimulatory.

GDP was weaker than expected in the fourth quarter, mainly due to weather effects on agricultural production. Growth is expected to strengthen, supported by accommodative monetary policy, a high terms of trade, government spending and population growth. Labour market conditions are projected to tighten further.

Residential construction continues to be hindered by capacity constraints. The Kiwibuild programme is expected to contribute to residential investment growth from 2019. House price inflation remains moderate with restrained credit growth and weak house sales.

CPI inflation is expected to weaken further in the near term due to softness in food and energy prices and adjustments to government charges. Tradables inflation is projected to remain subdued through the forecast period. Non-tradables inflation is moderate but is expected to increase in line with a rise in capacity pressure.  Over the medium term, CPI inflation is forecast to trend upwards towards the midpoint of the target range. Longer-term inflation expectations are well anchored at 2 percent.

Monetary policy will remain accommodative for a considerable period.  Numerous uncertainties remain and policy may need to adjust accordingly.


COBA and the Future Of Banking

I had the opportunity to participate in the Customer Owned Banking Association conference yesterday.  I hold the view the these smaller, but more customer aligned financial services organisation are Australia’s best kept secret.  In fact, often they offer better rates, and a distinctive set of cultural values. But they need to drive a different path to the majors, when the economics of their businesses are stressed.

The current environment with the more than 20 inquiries including the Royal Commission and the higher funding costs as represented by the 20 basis point spread growth in the A$ Bill/OIS raises a whole set of questions. Plus the FED is predicting a further 8 rate hikes in the USA over the next couple of years, taking the US rate well above 3%! That will impact here.

I made a video blog of my visit to Sydney, and included extracts from a live radio interview I did for 6PR on interest rates, and my comments from a panel discussion regarding the future of banking.




Fed Hikes Again, and More To Come

The Fed lifted, as expected. The “dots” chart also shows more to come.  The supporting data shows the economic is running “hot” and inflation is expected to rise further. This will have global impact.  The era of low interest rates in ending. The QE experiment is also over, but the debt legacy will last a generation.

This chart is based on policymakers’ assessments of appropriate monetary policy, which, by definition, is the future path of policy that each participant deems most likely to foster outcomes for economic activity and inflation that best satisfy his or her interpretation of the Federal Reserve’s dual objectives of maximum employment and stable prices.

Each shaded circle indicates the value (rounded to the nearest ⅛ percentage point) of an individual participant’s judgment of the midpoint of the  appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run.

Information received since the Federal Open Market Committee met in January indicates that the labor market has continued to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong in recent months, and the unemployment rate has stayed low. Recent data suggest that growth rates of household spending and business fixed investment have moderated from their strong fourth-quarter readings. On a 12-month basis, both overall inflation and inflation for items other than food and energy have continued to run below 2 percent. Market-based measures of inflation compensation have increased in recent months but remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The economic outlook has strengthened in recent months. The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong. Inflation on a 12-month basis is expected to move up in coming months and to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-1/2 to 1-3/4 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

Voting for the FOMC monetary policy action were Jerome H. Powell, Chairman; William C. Dudley, Vice Chairman; Thomas I. Barkin; Raphael W. Bostic; Lael Brainard; Loretta J. Mester; Randal K. Quarles; and John C. Williams.

Suncorp Hikes Interest Rates

From Australian Broker

Non-major bank Suncorp has announced it will hike interest rates on all variable rate home and small business loans, starting 28 March.

Variable Owner Occupier Principal and Interest rates will rise by 0.05% p.a., Variable Investor Principal and Interest rates will increase by 0.08% p.a., and Variable Interest Only rates increase go up by 0.12 p.a.

Suncorp’s Variable Small Business rates will increase by 0.15% p.a. and Access Equity (Line of Credit) rates will increase by 0.25% p.a.

The bank’s CEO David Carter said the decision to increase rates was based on increasing costs of funding, as well as meeting the costs associated with regulatory change. The outlook for US interest rates factored in the decision as well. “As a result, we have seen the key base cost of funding, being the three-month Bank Bill Swap Rate (BBSW), rise approximately 0.20%. This increase results in higher interest costs to our wholesale funding, as well as our retail funding portfolio, such as term deposits,” he said in a statement.

According to Suncorp, the “vast majority” of its customers will continue to pay rates well below the headline, due to the products’ various features and benefits.

“It remains our priority to offer a range of competitive products and services to all of our customers. The higher interest costs will benefit our deposit customers, with Suncorp offering attractive rates across term deposit and at call portfolios, including our new Growth Saver product that rewards regular savers with a 2.60% bonus interest rate,” Carter said.

Consumers need critical thinking to fend off banks’ bad behaviour

From The Conversation.

The irresponsible (if not predatory) lending and the selling of “junk” financial products highlighted by the Financial Services Royal Commission should raise concerns for regulators, educators and parents interested in financial literacy.

Research shows a strong correlation between financial literacy and literacy and numeracy skills. Literacy and numeracy are critical for, among other things, making sense of product disclosure statements and understanding the impact of loan terms and interest rates on the total amount to be repaid.

But teaching financial literacy requires going beyond these skills, by cultivating a healthy scepticism of financial institutions and the capabilities and confidence to make informed financial decisions.

There is a strong relationship between a low socioeconomic background and low financial literacy in both adolescents and adults.

It’s not just disadvantaged and vulnerable groups that struggle with financial decision-making. People who are highly educated in finance also make poor decisions – for instance, by focusing too much on growing their assets and ignoring risks.

But studies show that when regulation is effective and the financial system can be trusted, even consumers with limited financial knowledge and information-processing capabilities have the potential to deal with complex financial decisions.

For example, when considering mortgage protection insurance, applicants stand to benefit from knowing the actual risk of events like serious illness or injury that can affect their ability to meet monthly loan repayments.

Building financial capability

One way to develop better financial literacy is through simulating real-world risks, rewards and decisions in safe and supportive environments. For instance, families can play games like Monopoly and The Game of Life.

Secondary school students also have access to more sophisticated online simulations, such as the ESSI Money Game and the ASX Sharemarket Game.

Hypothetical scenarios like these provide opportunities for role play, where students can practise drawing on evidence and using it to think and reason about situations.

A recent survey of teachers of Year 7-10 commerce students revealed that more could also be done to teach students how to compare and choose between banks and financial products and services, what to do in the case of a financial scam, and how to escalate an unresolved complaint.

But we also need to take a look at the role banks play in financial education. Programs like the Commonwealth Bank’s Dollarmites Club and Westpac’s Solve to Save teach children about money on the banks’ terms.

A key call to action in these programs is often to open a bank account and activate a savings plan. In the Solve to Save program, parents pay a $10 weekly subscription, which is “automatically refunded” to their child’s nominated Westpac account every week they complete three mathematics exercises.

Late last year, in response to criticism by the consumer advocacy group Choice, the Commonwealth Bank stopped kickback payments to schools related to its longstanding Dollarmites scheme.

While the banks may be proud of their investment in these education programs, they serve to position the banks as experts in money matters while cultivating trust and brand loyalty.

What does it really mean to be smart with money?

Misguided trust has exposed vulnerable individuals to the moral hazard of the banks – and underscores the importance of improved financial regulation and education moving forward.

Given that borrowing decisions are complex, multidimensional and often emotional, it’s important to consider any lender’s motives, or “What’s in it for them?” Banks are profit-driven. This means an important question to ask oneself is: “Where can I get information and support that is independent, comprehensive and easy to understand?”

In the current climate, teaching capabilities for a healthy scepticism and personal agency is the way forward.

We also need to change the public perception of what it means to be financially literate. The conventional focus on individual responsibility and wealth accumulation is flawed.

Arguably, this focus has contributed to the need for a Financial Services Royal Commission. Whether you are a bank, a mortgage broker or a consumer, the impact of your decisions on others must be carefully considered.

While education can contribute to preparing all Australians for informed financial participation, the task is challenging.

Authors: Carly Sawatzki, Assistant Professor, University of Canberra; Levon Ellen Blue, Lecturer, Queensland University of Technology

ANZ to explore IPO as part of strategic options for UDC

ANZ says  it will explore the possibility of an initial public offering (IPO) of
ordinary shares in UDC Finance as part of a range of strategic options for UDC’s future.

A wholly-owned subsidiary of ANZ Bank New Zealand, UDC is New Zealand’s leading asset finance company funding plant equipment, vehicles and machinery.

ANZ New Zealand CEO David Hisco said: “We have been looking at strategic options for UDC’s future for some time as part of ANZ’s strategy to simplify the bank and improve capital efficiency.

“While UDC is continuing to perform well and there is no immediate requirement to make decisions, after last year’s planned sale to HNA did not proceed it makes sense to keep examining a broad range of options for UDC’s future.

“This will include exploring whether, subject to market conditions, an IPO would be in the interests of UDC’s staff and customers, and ANZ shareholders.

“The range of strategic options we have for UDC, including approaches we have received regarding the business and the option of retaining it, will take a number of months to examine before any decision is made. In the meantime, it will continue to be business as usual for UDC,” Mr Hisco said.

China’s new central bank governor will have to deal with massive debt and an ambitious economic agenda

From The Conversation.

The Chinese government has appointed a new head of its central bank. Yi Gang, currently the deputy governor of the People’s Bank of China, will take over the leadership from Zhou Xiaochuan, who had been in the position since 2002.

As China’s central bank oversees the stability of the world’s second-largest economy and the world’s largest pile of foreign reserves, this is a change the global economy is watching closely.

A US-trained economist, Yi received his doctorate in economics from the University of Illinois in 1986. He was a professor at Peking University in China following various academic positions in the US, before joining China’s central bank in 1997. Yi is known in academia for his expertise on inflation and price instability.

Yi developed his technocratic career exclusively within the headquarters of the central bank, taking up various leading positions in areas of monetary policy, exchange rate policy, and foreign reserve management. He then became the right-hand man of Zhou, who dominated Beijing’s economic policy-making for a record 15 years.

However Yi’s governorship came as a surprise, given the widely circulated rumours of other powerful contenders, such as Liu He, now announced as a vice premier of China, and Guo Shuqing, the chairman of China Banking Regulatory Commission.

But the appointment makes sense if the reshuffle of president Xi Jinping’s economic team is taken into account, as like-minded liberals lining up in key positions. Yi will actually work directly under Liu, who also trained in the US, ensuring that the government keeps in close consultation with the central bank while the bank does not stray politically.

Problems the new governor will have to confront

Now that the jockeying for the top position at the central bank is over, the new governor is bound to carry on Zhou’s liberal legacy and to tackle some of the more daunting challenges the Chinese economy faces.

First up is the need to further strengthen the central bank, which has been given extra duties in financial legislation and regulation in the latest round of administrative streamlining announced at the People’s Congress. After all, the authority of the central bank in government circles over the last two decades has largely hinged on the bank playing an indispensable role in providing professional expertise.

Yi will also work to defuse the debt bomb that has been lurking behind a series of alarming statistics of the Chinese economy. In particular, China’s total debt has almost doubled between 2008 and mid-2017, to 256% of GDP as the economy slowed down from double-digit growth to a mere 6%.

A distressed financial system could trigger a systemic economic collapse. To reign in this possibility, Yi will have to work closely with authorities in the State Council, China’s cabinet, to contain the risks to a manageable scale.

The bank will have to walk a fine line here. It must contain the shadow banking sector, which is largely beyond the radar of the authorities. At the same time it has to make sure such tightening does not choke financial innovations embodied by the burgeoning internet finance and fintech.

Equally, if not more important, the financial reforms must be taken to facilitate China’s grand economic transition. In the short to medium term, this entails a further aligning of China’s interest rates to China’s market levels.

They also need to bring its exchange rates in line with international market levels, open its financial markets in a gradual and orderly fashion, and push for the use of the Chinese currency in the global market. This is an ambitious project initiated by Zhou with the goal of seeing the renminbi’s international status on par with the greenback.

A more open and liberal financial system in China is of course good news for the world economy as well because central banks need to work together to address increasingly divergent policy priorities among advanced and emerging economies.

Whether or not Yi becomes the next “Mr RMB” (as Zhou is often dubbed), he needs to be the “Dr Reformer” at this critical stage of both the Chinese and global economy.

Author: Hui Feng, Future Fellow and Senior Research Fellow, Griffith University

Mortgage Expenses In The Spotlight

The Royal Commission into Financial Services Misconduct, yesterday spent time with ANZ, and examined their expenses validation and verification processes, especially when applications were made via the broker channel.

Astonishingly, it appears that the bank may ignore the expense data from the broker as submitted (so the Commission asked why they capture the data at all!). Household Expenditure Measure (HEMs) figured in the discussion, as a test which was used by the bank in the assessment process. It will be interesting to see if the Commission views this approach is compliant with their responsible lending obligations.

It begs the question more broadly, are mortgages held by the banks supported by appropriate expense calculations? Some are saying that up to 40% of loans on book may have issues.

We also note that the “mortgage power” type calculators available on bank web sites to give an indication of a borrowers ability to get a mortgage, on average now gives a mortgage figure some 20% lower than a couple of years back.

So, many borrowers would not now get the mortgage they did then. Think about the implications for existing borrowers seeking to refinance, or to move from interest only loans to principal and interest loans!

There was also more data on lower auction clearance rates. Plus predicted falls in home prices, from Moody’s.

When you overlay the Commission findings, with the sales trends (deep discounts are now a feature of current sales, see above), it seems to me home prices are set for more falls in the months ahead.

We discussed this in our latest video blog.

More broadly, the Commission shows the massive repair job the banks have to do on their reputations and culture. No wonder their share prices are down.  Of more significance are the structural risks to the economy, as households continue to struggle with over-committed budgets thanks to lax lending.  This is unlikely to end well.

The purpose of the Commission was to remove uncertainty from the banking sector, but as it goes about its business, in fact the levels of concern are rising. It has royally back-fired!

But there is a good chance that customer outcomes will be enhanced as the consequences  are digested. This would be an excellent outcome. But not an intended one.

Higher asset threshold for US SIFI designation will ease some banks’ regulatory oversight, a credit negative

From Moody’s

Last Wednesday, the US Senate passed the Economic Growth, Regulatory Relief, and Consumer Protection Act. A key component of this bill increases the asset threshold for a bank to be designated a systemically important financial institution (SIFI) to $250 billion of total consolidated assets from $50 billion, the threshold defined in the Dodd-Frank Act of 2010.

For US banks with assets of less than $250 billion, the higher asset threshold for SIFI designation is likely to lead to a relaxation of risk governance and encourage more aggressive capital management, a credit-negative outcome.

SIFI banks are subject to the enhanced prudential standards of the US Federal Reserve (Fed). The regulatory oversight of SIFIs is greater than for other banks, and SIFIs participate in the Fed’s annual Dodd-Frank Act stress test (DFAST) and the Comprehensive Capital Analysis and Review (CCAR), which evaluate banks’ capital adequacy under stress scenarios. Furthermore, transparency will decline with fewer participants in the public comparative assessment the stress tests provide.

In 2018, the 38 bank holding companies shown in the exhibit below are subject to the Fed’s annual capital stress test. Passage of the bill into law would immediately exempt four banks with less than $100 billion of assets from the Fed’s enhanced prudential standards, which includes the stress test and living will requirements. These banks will have the most leeway in relaxing risk governance practices and managing their capital.

The 21 banks at the right of the top exhibit that have assets of $100-$250 billion1 could become exempt from enhanced prudential standards 18 months after passage of the bill into law. However, the Fed will have the authority to apply enhanced oversight to any bank holding company of this asset size and will still conduct periodic stress tests. In the 18 months after passage into law, it will be up to the Fed to develop a more tailored enhanced oversight regime for the $100-$250 billion asset group. The Fed also could continue to apply the same enhanced prudential standards. Therefore, it is difficult to assess the potential for their easier risk governance practices until more about the regulatory oversight is known.

If many of these banks are no longer required to participate in the public stress tests, it would reduce transparency. The quantitative results of DFAST and CCAR provide a relative rank ordering of stress capital resilience under a common set of assumptions. The loss of such transparency is credit negative.

For the largest banks, those with more than $250 billion in assets that remain SIFIs, there are no changes in the Fed’s supervision. The bill also specifies that foreign banking organizations with consolidated assets of $100 billion or more are still subject to enhanced prudential standards and intermediate holding company requirements.

In order to become law, the bill must also be passed by the US House of Representatives and signed by the president. This year’s annual Fed stress test will proceed as usual with submissions by the banks due 5 April, with results announced in June.


APRA approves ING Bank (Australia) Limited to use internal models to calculate regulatory capital

The Australian Prudential Regulation Authority (APRA) today announced that it has granted approval to ING Bank (Australia) Limited to begin using its internal models to determine its regulatory capital requirements for credit and market risk, commencing from the quarter ended 30 June 2018.

ING is the first authorised deposit-taking institution (ADI) to be accredited since APRA revised the accreditation process in 2015. Consistent with suggestions from the 2014 Financial System Inquiry, APRA’s changes were intended to make the process more accessible for ADIs to achieve accreditation, without weakening the overall standards that advanced accreditation requires.

APRA continues to engage with other ADIs seeking accreditation to use internal models for calculating regulatory capital requirements.