700 Years Of Data Suggests The Reversal In Rates Will Be Rapid

From Bank Underground.

A GUEST post on the Bank of England’s “Bank Underground” blog makes the point that most reversals after periods of interest rate declines are rapid. When rate cycles turn, real rates can relatively swiftly accelerate. The current cycle of rate decline is one of the longest in history, but if the analysis is right, the rate of correction to more normal levels may be quicker than people are expecting – and a slow rate of increases designed to allow the economy to acclimatize may not be possible.  Not pretty if you are a sovereign or household sitting on a pile of currently cheap debt!

With core inflation rates remaining low in many advanced economies, proponents of the “secular stagnation” narrative –that markets are trapped in a period of permanently lower equilibrium real rates- have recently doubled down on their pessimistic outlook. Building on an earlier post on nominal rates this post takes a much longer-term view on real rates using a dataset going back over the past 7 centuries, and finds evidence that the trend decline in real rates since the 1980s fits into a pattern of a much deeper trend stretching back 5 centuries. Looking at cyclical dynamics, however, the evidence from eight previous “real rate depressions” is that turnarounds from such environments, when they occur, have typically been both quick and sizeable.

Despite much research into the causes of real rate distortions in recent years, the discussion has arguably suffered from a lack of long-term context. Key additions – such as the  influential BoE staff working paper confirming the role of excess savings and lower investment preferences – typically trace back their observations to the late Bretton Woods period, or at best to Alvin Hansen’s time in the interwar period. Hamilton et al. and Eichengreen are rare exceptions in their inclusion of 19th century data.

Therefore, the majority of work on secular stagnation– and with it the debate regarding bond market valuations  – fails to consider the deeper historical rate trends. In contrast, a  multi-century dataset  offers the opportunity to look at cyclical behavior and the dynamics of reversals from earlier real rate depressions.

Seven centuries of real risk free rates

In this spirit, this post (based on a new Staff Working Paper) provides a real rate dataset for the last 700 years, and identifies a total of nine “real rate depressions” sharing similar traits to the trend observed since the 1980s.

This chart further expands risk-free nominal bond data introduced in a previous post, and adjusts for historical ex-post inflation data provided by Bob Allen, Bank, Bundesbank, archival, and FRED data. We trace the use of the dominant risk-free asset over time, starting with sovereign rates in the Italian city states in the 14th and 15th centuries, later switching to long-term rates in Spain, followed by the Province of Holland, since 1703 the UK, subsequently Germany, and finally the US.

The all-time real rate average stands at 4.78% and the 200-year real rate average stands at 2.6%. Relative to both historical benchmarks, the current market environment thus remains severely depressed.

Upon closer inspection, it can be shown that trend real rates have been following a downward path for close to five hundred years, on a variety of measures. The development since the 1980s does not constitute a fundamental break with these tendencies.

Regressing the 7-year average on a constant time trend (the red line) indicates an average fall of 1.6 basis points per annum. Simple averages tell a similar story of decline. In many ways, therefore, the “secular decline” in real rates since the days of Paul Volcker is but a part of a deeper “millennial decline” tracing back its roots to the days of the late Quattrocento.

The all-time peaks in real yields in the mid-1400s coincide with the geopolitical escalations amid the fall of Constantinople, the seizure of silver mines by the Ottomans, on the Balkans, and evidence of increasing European BoP deficits to the Levant – factors consistent with the narrative of a “Great Bullion Famine”. The “real rate turning point” on our basis thus somewhat precedes the classical dating of the “financial revolution” and the sharp inflows of New World treasure. The falling trend continues unabatedly after other political inflections, such as the Reformation, the Thirty Years War, and into the modern days of Globalization.

The breakdown of real risk-free rates: nominal and inflation components

The real rate, by definition, represents the difference between nominal rates and inflation.

The 700-year average annual ex-post headline inflation for the risk-free issuer stands at 1.09%,, the 200-year average, since 1817, stands at 1.55%, with a further pickup in the 1900s. Three observations stand out: First, the past 60 years, in which the US has been the benchmark bond issuer has been the most inflationary in our whole sample period; second, current inflation rates of slightly below 2% remain fully in-line with the ex-post performance witnessed in modern times, with today’s typical inflation targets already being accommodative if measured against (very) long run trends. Third, never before has a longer period without deflation existed than the ongoing 70-year spell since World War Two.

Economists often view the real-nominal-inflation nexus through the lens of the Fisher equation– where long run nominal rates are the sum of two “structural” variables: real rates, and (expected) inflation.  The chart below presents the real rates and ex post inflation rates in terms of century averages:

The green bars show the fall in real rates, blue bars the contribution of inflation. Evidently, the fall in real rates over successive centuries has been partially muted by the higher inflation in the 20th and 21st centuries. As a result the decline in nominal rates over time has been somewhat less than the underlying fall in real rates.

“Real rate depression cycles”

Focusing on our cyclical precedents, on several previous occasions, rates have exhibited a sustained divergence from long-term averages. Over the seven centuries, nine historical “real rate depression cycles” can be identified, which saw a secular decline of real interest rates, followed by reversals.  The chart below plots the size and duration of these compression episodes:

Our current “secular stagnation” of real rates, at 34 years, is the second longest thus far recorded. Only the years immediately surrounding the discovery of America outstrip the current cycle by length. Measured by total rate compression from peak to trough, the period from 1325 to 1353 – at 1700 basis points in real rates – is the most notable. In our 7-year moving average dataset, the all-time trough within depression episodes is recorded in 1948, at -5.3%.  Turning to how these depressions end, the chart below plots the path of real rates in each reversal period following the trough.

Most reversals to “real rate stagnation” periods have been rapid, non-linear, and took place on average after 26 years. Within 24-months after hitting their troughs in the rate depression cycle, rates gained on average 315 basis points, with two reversals showing real rate appreciations of more than 600 basis points within 2 years. Generally, there is solid historical evidence, therefore, for Alan Greenspan’s recent assertion that real rates will rise “reasonably fast”, once having turned.

Fundamental Stagnations: A closer look at the “Long Depression”

Most of the eight previous cyclical “real rate depressions” were eventually disrupted by geopolitical events or catastrophes, with several – such as the Black Death, the Thirty Years War, or World War Two – combining both demographic, and geopolitical inflections. Most cyclical real rate depressions equally coincided with inflation outperformances. But for a minority of cycles, economic fundamentals were decisive, and exhibited both excess savings and subdued inflation. The prime example – and likely the closest historical analogy to today’s “secular stagnation” – is represented by the global “Long Depression” of the 1880s and 1890s.

Following years of a global railroad investment frenzy, and global overcapacity indicators inflecting in the mid-1860s, the infamous “Panic of 1873” heralded the advent of two decades of low productivity growth, deflationary price dynamics, and a rise in global populism and protectionism.

Following the crash, the UK’s 10-year moving average TFP growth declined from 1.7% in the early 1870s, to flat, and even at times negative levels in the following two decades (Chart below). Labor productivity in particular shrunk, plummeting by around two-thirds in the same timeframe, after reaching new all-time records at the dawn of the crisis. Though recent research has emphasized nominal factors for the period, most contemporaries including Joseph Schumpeter stressed real drivers. Indeed, real GDP trend growth in the UK reached century lows by the 1890s. Despite alleged money scarcity, borrowing rates declined.

What ended the Long Depression? Labor productivity bottomed out in 1892-3, prior to the discovery of gold at the Klondike, and the associated monetary expansion. Wage inflation started outstripping productivity increases as early as 1885, leading the recovery in general inflation. And US equities finally bounced back from their 15-year lows with the Presidential election of William McKinley – a Republican pro-business protectionist – in November 1896. In other words, there is strong evidence suggesting that the last “secular stagnation cycle” started fading relatively autonomously after just over two decades following the key financial shock, not requiring the aid of decisive fiscal or monetary stimulus.

Conclusion

On aggregate, then, the past 30-odd years more than hold their own in the ranks of historically significant rate depressions. But the trend fall seen over this period is a but a part of a much longer ”millennial trend”. It is thus unlikely that current dynamics can be fully rationalized in a “secular stagnation framework”. Meanwhile, looking at past cyclical patterns, the evidence suggests that when rate cycles turn, real rates can relatively swiftly accelerate.

Paul Schmelzing is an academic visitor to the Bank from Harvard University’s History Department.

Note: Bank Underground is a blog for Bank of England staff to share views that challenge – or support – prevailing policy orthodoxies. The views expressed here are those of the authors, and are not necessarily those of the Bank of England or its policy committees.

The RBA may have to lift rates to manage debt risk

From Business Insider.

Financial stability risks have taken on increased importance in monetary policy deliberations of Reserve Bank of Australia (RBA) Governor Philip Lowe – far more than under his predecessor, Glenn Stevens.

The importance of managing those risks, especially in the household sector, were scattered, yet again, through the RBA’s November monetary policy statement this week.

“Household incomes are growing slowly and debt levels are high,” Lowe said, elaborating on the uncertain outlook for household consumption given recent weakness in retail sales.

And, on household debt specifically, he said that “growth in housing debt has been outpacing the slow growth in household income for some time,” repeating the warning he issued in October.

Clearly, managing these risks, in his opinion, are of utmost importance.

Despite persistently low inflationary pressures, weak economic growth, softening household spending levels and strength in the Australian dollar, Lowe has left interest rates unchanged since his took over as Governor in September last year, a distinct shift in mindset to what was seen in prior years.

Gone are the days of rates moving like clockwork in the month following a quarterly consumer price inflation (CPI) report, replaced instead by a broader focus that appears to place less emphasis on the inflation outlook and more on what could happen in other parts of economy should rates be lowered again, especially the east coast property market.

The era of continually lowering rates to bring inflation back into the bank’s 2-3% target in a more timely manner now appears to be over.

Lowe, as many Australians are acutely aware, knows all too well what happened in 2016 when the RBA cut rates twice in an attempt to boost inflationary pressures.

Property prices in Sydney and Melbourne surged again, thanks largely to a pickup in investor activity. Household debt levels, as a response, rose from already elevated levels, far outpacing growth in household incomes.

Household leverage, therefore, continued to increase, helping to explain why Lowe has been reluctant to cut interest rates further, pouring even more fuel on an already hot east coast property market.

As he told parliamentarians earlier this year, further rate cuts “would probably push up house prices a bit more, because most of the borrowing would be borrowing for housing.”

Instead of hiking rates to mitigate financial stability risks as was usually the case in the past, the RBA, working with other members of Australia’s Council of Financial Regulators — APRA, ASIC and Treasury — decided to go down another path, introducing tougher macroprudential restrictions on interest-only lending earlier this year, building upon the 10% annual cap on investor housing credit growth introduced by APRA in late 2014.

On the early evidence, it’s succeeded in helping to cool the rampant Sydney and Melbourne property markets.

According to data from CoreLogic, Sydney house prices have fallen in each of the past two months, coinciding with auction clearance rates falling to the lowest level since January 2016.

Price growth in Melbourne has also slowed, logging the smallest quarterly increase since mid-2016 in the three months to October. Clearance rates there have also fallen from the highs seen earlier this year.

With prices in Sydney going backwards and those in Melbourne, it saw national house prices, on a weighted basis, remain unchanged last month.

As Lowe said earlier this week, “housing prices have shown little change over recent months”, partially attributing the slowdown to tougher macroprudential measures introduced in late March.

“Credit standards have been tightened in a way that has reduced the risk profile of borrowers,” he said.

However, while this, along with other factors such as affordability constraints and out-of-cycle mortgage rate increases for some borrowers, has undoubtedly helped to slow the housing market without having to resort to rate hikes, Lowe still has a problem that remains unaddressed.

No only is growth in housing debt outpacing household incomes, it’s actually widened further this year despite tighter lending restrictions.

This excellent chart from ANZ shows the quandary facing Lowe.

Source: ANZ

 

It shows Australia’s household debt to income ratio, expressed as an annual percentage change.

“The most recent RBA data on private sector credit showed that in the year to September housing credit was up 6.6% year-on-year,” says David Plank, Head of Australian Economics at ANZ.

“The annual growth rate has been steady since May, though it has accelerated marginally since this time last year and is still significantly outpacing income growth.”

So even with the slowdown in the housing market and increased scrutiny of borrowers, household leverage has still continued to increase, adding to financial stability risks should an unexpected economic shock occur.

Plank suggests that unless income growth accelerates substantially, or growth in housing credit slows, household leverage will likely increase further.

He doesn’t hold out much hope that an acceleration in income growth will be able to achieve this in isolation.

“We very much doubt that an acceleration of income growth will completely close the gap,” he says.

“For this to happen, we need to see a further slowing in the growth rate of housing debt. “We think it unlikely that the gap can be closed without additional policy action.”

While Plank doesn’t think the RBA or APRA will rush into tighter restrictions on housing lending anytime soon, noting that annual housing credit growth has slowed marginally since APRA changes were introduced earlier this year, he says that other measures will likely be required to slow or reduce household leverage.

And that list includes rate hikes.

“We think the RBA and APRA will wait to see how things unfold, especially with house price inflation continuing to slow,” he says.

“We are sceptical, however, that the gap between debt and income growth will close without more direct policy action.

“This may initially be in the form of further macro-prudential policy, but ultimately we think it will take somewhat higher interest rates, at the very least, to bring household debt growth in line with that of income.”

ANZ is forecasting that the RBA will lift interest rates twice in 2018 — once in May and again in the second half of the year — making it one of the more hawkish forecasters in the market at present.

“We think it will opt to raise rates around the middle of next year, so long as it is confident that inflation is not moving lower and the economy is on track to deliver a falling unemployment rate,” Plank says.

The question, he says, is how will the RBA balance its inflation and financial stability objectives?

Attempting to address financial stability risks while at the same time ensuring the fledgling economic recovery isn’t derailed before it is truly self-sustaining will not be an easy task for the RBA.

Indeed, one could easily argue that higher interest rates or tighter macroprudential measures to reduce household leverage could actually heighten financial instability risks.

Given the pressure on households from high levels of indebtedness, weak wage growth and increased energy costs, along with the slowdown in the housing markets that’s already underway, any further measures could place even further pressure on household balance sheets, creating additional headwinds for household consumption that already exist.

As the most important component in the Australian economy, weaker consumption levels would almost certainly lead to slower economic growth and softer labour market conditions.

For highly indebted households, a slowdown in the both the housing and labour markets — especially at the same time — would do little to mitigate financial stability risks.

One suspects it would be the exact opposite outcome, in fact.

You can see the dilemma facing Lowe, trying to solve one problem without creating an even larger one in response.

Given how influential the property market has become on the Australian economy, a policy misstep now could have significant ramifications, both now or in the future.

Small Businesses Warned on Email Practices

From Smart Company.

Small businesses are warned to get across their obligations when managing customer databases and sending email communications, after internet provider TPG was fined $360,000 this month for failing to process “unsubscribe” requests from customers.

The Australian Communications and Media Authority (ACMA) confirmed last Friday that TPG Internet received the infringement notice after an investigation prompted by customer complaints revealed the company’s “unsubscribe” function was not working as required in April 2017.

Customers complained that despite having hit the “unsubscribe” button after receiving electronic promotions from TPG, and withdrawing consent to receive such material, they kept getting these messages.

ACMA found TPG’s systems weren’t processing the requests properly in the month of April, meaning the company breached subsection 16(1) of the Spam Act 2003, which relates to sending messages to customers without their consent.

The Act makes it compulsory for businesses sending electronic communications to include “a functional unsubscribe facility”.

“This is a timely reminder to anyone who conducts email or SMS marketing to make sure the systems they have for maintaining their marketing lists are working well,” ACMA chair Nerida O’Loughlin said in a statement.

The communications authority has marked consent-based marketing strategies as an area of top priority.

However, director of CP Communications Catriona Pollard tells SmartCompany that in her experience discussing email and electronic content with businesses, too many are not aware of are rules for collecting data and communicating with customers.

“I would suggest there is a high percentage of people who haven’t ever read the Spam Act and don’t have any information about what they can and can’t do,” she says.

Aside from the risks of fines, Pollard says from a brand perspective, this lack of knowledge can mean companies might really infuriate customers.

“People hate spam, and I think businesses are often more focused on building up their database than on how people will see them,” she says.

Unsubscribes are unavoidable, so make sure the function works

Pollard warns businesses never to do things like “hide the unsubscribe button”, explaining unsubscribe requests are “part and parcel” of sending any digital communication, and businesses must take that on board.

Companies will see regular unsubscribe requests from customers, but even so, “email marketing is still one of the most powerful marketing tools,” Pollard says.

Director of InsideOut PR, Nicole Reaney, observes businesses are often keen to use low-cost formats like email to build a user base, but they still have to follow legislative requirements and make sure customers have consented to getting this information.

“It’s extremely tempting for businesses to utilise the very affordable and efficient platform of digital media with direct emails and text messages. However, it does place them in a position of exposure if there was no prior relationship or consent to the contact,” she says.

Pollard says for smaller operators, one way to get bang for buck is to focus on writing informative and useful content for your audience. That way, regardless of some people hitting the unsubscribe, a business will be engaging with those who most want that kind of information.

“Writing really good copy is really effective. It’s not just thinking about blasting information out to your database,” she says.

SmartCompany contacted TPG Internet for comment but did not receive a response prior to publication.

US Tax Plan Will Be Revenue Negative, Result in Higher Deficits

United States: Outlook for Public Finances Worsens says Fitch Ratings who expects a version of the tax cuts presented in the Tax Cuts and Jobs Act to pass the US Congress.

Such reform would deliver a modest and temporary spur to growth, already reflected in growth forecasts of 2.5% for 2018. However, it will lead to wider fiscal deficits and add significantly to US government debt. As such, Fitch has revised up its medium-term debt forecast.

US federal debt was 77% of GDP for this fiscal year. Fitch believes the tax package will be revenue negative, even under generous assumptions about its growth impact. Under a realistic scenario of tax cuts and macro conditions, the federal deficit will reach 4% of GDP by next year, and the US debt/GDP ratio would rise to 120% of GDP by 2027.

The Republican tax plan delivers a tax cut on corporations, seeking to lower the corporate tax rate to 20% from 35%, and removing many exemptions, while eliminating some tax breaks affecting corporate and personal filers. It would leave the overall personal tax burden somewhat lower, although the effects would differ depending on circumstances.

Tax cuts may lead to a short-lived boost to output, but Fitch believes that they will not pay for themselves or lead to a permanently higher growth rate. The cost of capital is already low and corporate profits are elevated. In addition, the effective tax rate paid by large corporations is well below the existing statutory rate. From a macroeconomic perspective, adding to demand at this point in the economic cycle could add to inflationary pressures and lead to additional monetary policy tightening.

Fitch expects US economic growth to peak at 2.5% in 2018 before falling back to 2.2% in 2019. The US will enter the next downturn with a general government “structural deficit” (subtracting the impact of the economic cycle) larger than any other ‘AAA’ sovereign, leaving the US more exposed to a downturn than other similarly rated sovereigns.

The US is the most indebted ‘AAA’ country and it is running the loosest fiscal stance. Long-term debt dynamics are also more negative than those of peers, with health and social security spending commitments set to rise over the next decade. In Fitch’s view, these weaknesses are outweighed by financing flexibility and the US dollar’s reserve currency status, underpinning its ‘AAA’/Stable rating. The main short-term risk to the rating would be a failure to raise the debt ceiling by 1Q18, when the Treasury’s scope for extraordinary measures is expected to be exhausted. The debt ceiling is currently suspended until early December.

What Does The Recent Bank Results Tell Us About Mortgage Defaults?

We have now had results in from most of the major players in retail banking this reporting season. One interesting point relates to mortgage defaults.  Are they rising, or not?

Below are the key charts from the various players. Actually, there are some significant differences. Some are suggesting WA defaults in particular are easing off now, while others are still showing ongoing rises.

This may reflect different reporting periods, or does it highlight differences in underwriting standards? Our modelling suggests that the rate of growth in stress in WA is slowing, but it is rising in NSW and VIC; and there is a 18-24 month lag between mortgage stress and mortgage default. So, in the light of expected flat income growth, continued growth in mortgage lending at 3x income, rising costs of living and the risk of international funding rates rising, we think it is too soon to declare defaults have peaked.

One final point, many households have sufficient capital buffers to repay the bank, thanks to ongoing home price rises. Should prices start to fall significantly, this would change the picture significantly.

Bank of Queensland

ANZ

CBA

Genworth

Westpac

US Corporate Tax Reform: Implications for the Rest of the World

The Treasure has released a paper “US Corporate Tax Reform: Implications for the rest of the world” which examines the likely impacts of the US reforms on the US and on the rest of the world, placing the US changes in the context of the global trend toward lower corporate taxes.

The paper says that the economic impact of the Republicans’ tax plan will depend on how time and compromise shape the package that is ultimately legislated. Key in this regard is the size of the cut, how it is funded and whether investors believe it is a permanent reduction.

On 27 September 2017, the United States (US) Administration and Republican Congressional leadership released a framework for US tax reform, including a reduction in the federal corporate tax rate from 35 to 20 per cent.

The key elements of tax framework with respect to corporate tax are:

  • a reduction in the federal corporate income tax rate from 35 to 20 per cent;
  • immediate expensing of depreciable assets (except structures) for at least 5 years;
  • limitations on interest deductions;
  • the removal of the domestic production deduction;
  • an exemption for dividends paid by foreign subsidies to US companies (where the US company owns 10 per cent or more of the foreign company); and
  • a one-time tax on overseas profits.

These proposals were reflected in the draft of the Tax Cuts and Jobs Act released by the House Ways and Means Committee on 2 November 2017.

This paper examines the likely impact of this reform on the US and rest of the world, placing the US changes in the context of the global trend toward lower corporate taxes.

In theory, a corporate tax rate cut stimulates investment by making more investment opportunities sufficiently profitable to attract financing. The extent to which this is the case in practice will depend on how the tax cut is funded and whether investors consider the tax cut to be permanent. If the corporate tax rate cut results in an overall reduction in tax on US investments and investors believe that the tax cut is permanent, we are likely to see an increase in the level of US investment. If investors believe that the tax cut is temporary, the effect on US investment may be minimal. Ultimately, the economic impact of the plan on the US will depend on how time and compromise shape the final package.

If a US corporate tax cut does result in an investment boom, goods, labour and funds will be required. In a scenario in which the investment boom is largely funded domestically from US savings, negative impacts on the rest of the world are likely to be short-lived and modest.

Realistically, however, a US investment boom is likely to be only partially funded domestically and would draw funds and goods from the rest of the world. In this scenario, the rest of the world would experience a decline in capital stock resulting from the flow of capital into the US. The magnitude of the resulting welfare loss in those countries will depend on the size of the US corporate tax cut; how it is funded; the elasticity of the US labour supply response and the US saving response. For Australia, the size of the negative impact will also depend on how other countries respond.

While the size of the US economy means changes to the US tax system have particular significance, it is important to consider these reforms as part of an ongoing trend. As capital markets have become increasingly global and business location increasingly mobile, governments have sought to drive economic growth in their jurisdictions by lowering corporate tax rates. The US reforms have the potential to accelerate tax competition between jurisdictions, making Australia’s current corporate tax rate increasingly uncompetitive internationally.

While the Administration and Republican Congressional leadership have indicated that they will ‘set aside’ the idea contained in the House Republicans’ 2016 plan to move to a destination-based cash flow tax (DBCFT), this paper also provides a discussion of the theoretical underpinnings of the proposal.

CBA 1Q18 Trading Update

CBA released their latest trading update today, with a rise in profit, and volumes as well as a lift in capital. Expenses were higher reflecting some provisions relating to AUSTRAC, but loan impairments were lower. WA appears to be the most problematic state.

Their unaudited statutory net profit was approximately $2.80bn in the quarter and their unaudited cash earnings was approximately $2.65bn in the quarter, up 6% (on average of two FY17 second half quarters). Both operating income and expense was up 4%.

Operating income grew by 4%, with banking income supported by improved margins. Home lending growth was managed within regulatory limits.

Trading income was broadly flat. Funds management income decreased slightly, with lower margins partly offset by the benefit of positive investment markets, which contributed to AUM and FUA growth in the quarter.

Insurance income improved reflecting fewer weather events and the non-recurrence of loss recognition.

Group Net Interest Margin was higher in the quarter driven by asset repricing and reduced liquid asset balances, partly offset by the impact of the banking levy, higher funding costs and competition.

Expense growth of 4% includes provisions for their current estimates of future project costs associated with regulatory actions and compliance programs – including those related to the Australian Transaction Reports and Analysis Centre (AUSTRAC) proceedings. On 3 August 2017, AUSTRAC commenced civil penalty proceedings against CBA. CBA is preparing to lodge its defence in response to the allegations in the Statement of Claim and at this time it is not possible to reliably estimate any potential penalties relating to these proceedings. Any such potential penalties are therefore excluded from these provisions.

Loan Impairment Expense (LIE) of $198 million in the quarter equated to 11 basis points of Gross Loans and Acceptances, compared to 15 basis points in FY17.

Corporate LIE was substantially lower in the quarter. Troublesome and impaired assets were lower at $6.1 billion, with broadly stable outcomes across most sectors.

Consumer arrears were seasonally lower but continued to be elevated in Western Australia.

Prudent levels of credit provisioning were maintained, with Total Provisions at approximately $3.7 billion.

68% of their balance sheet is funded from deposits.

The average tenor of wholesale funding extended a little. The Group issued $9.5 billion of long term funding in the quarter, including a 30 year US$1.5bn issue –a first for an Australian major bank.

The Net Stable Funding Ratio (NSFR) was 107% at September 2017.

The Liquidity Coverage Ratio (LCR) was 131% as at September 2017, with liquid asset balances and net cash outflows moving by similar amounts in the quarter. Liquid assets totalled $132 billion as at September 2017.

The Group’s Leverage Ratio was 5.2% on an APRA basis and 5.9% on an internationally comparable basis, an increase under both measures of 10 basis points on June 17.

The Group’s Common Equity Tier 1 (CET1) APRA ratio was 10.1% as at 30 September 2017. After allowing for the impact of the 2017 final dividend (which included the issuance of shares in respect of the Dividend Reinvestment Plan), CET1 increased 55 basis points in the quarter.

Credit Risk Weighted Assets (RWAs) were lower in the quarter, contributing 16 basis points to CET1, partially offset by higher IRRBB9(-13 bpts) driven by interest rate movements and risk management activities.

The maturity of a further $350m of Colonial debt compressed CET1 by 8 basis points in the quarter. The final tranche of Colonial debt ($315m) is due to mature in the June 2018 half year, with an estimated CET1 impact of -7 basis points.

In September 2017 the Group announced the sale of its Australian and New Zealand life insurance operations to AIA Group Ltd. The sale is expected to be completed in calendar year 2018 and is expected to result in a pro-forma uplift to the CET1 (APRA) ratio of approximately 70 basis points.

ANZ Appoints New Lead for New Business, Emerging Tech and Ventures

ANZ today announced it has appointed Ron Spector as Managing Director, New Business, Emerging Technology and Ventures, reporting to Group Executive Digital Banking Maile Carnegie.

Currently based in San Francisco, Mr Spector is a strategic innovation and venture advisor with more than 27 years’ international experience in financial services, retail and media industries.

In his new role, Mr Spector will have responsibility for developing potential new business opportunities and disruptive technologies as well as investing in emerging growth companies to improve the products and services provided to customers.

Commenting on the appointment, Mrs Carnegie said: “Ron will lead a Group-wide function to accelerate our efforts to make our customers’ lives simpler and find new, innovative opportunities to build a world-class digital bank.

“We’re confident this focus will open new markets for ANZ, while also improving the products and services we provide our customers,” Mrs Carnegie said.

Prior to joining ANZ, Mr Spector was CEO of Circini Innovation in San Francisco, CEO of Conferserv Inc, and Senior Vice President of MediaZone. He was also a founding partner of Macquarie Technology Ventures and was US Head of Technology Investment Banking at Macquarie Group.

Mr Spector holds a Doctor of Jurisprudence from the University of the Pacific and a Bachelor of Arts (Hons) from the University of California.

Mr Spector will be based in Sydney from January 2018.

RBA Holds (Month 15)

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

Conditions in the global economy are continuing to improve. Labour markets have tightened and further above-trend growth is expected in a number of advanced economies, although uncertainties remain. Growth in the Chinese economy is being supported by increased spending on infrastructure and property construction, with the high level of debt continuing to present a medium-term risk. Australia’s terms of trade are expected to decline in the period ahead but remain at relatively high levels.

Wage growth remains low in most countries, as does core inflation. Headline inflation rates are generally lower than at the start of the year, largely reflecting the earlier decline in oil prices. In the United States, the Federal Reserve has started the process of balance sheet normalisation and expects to increase interest rates further. In a number of other major advanced economies, monetary policy has become a bit less accommodative. Equity markets have been strong, credit spreads have narrowed and volatility in financial markets remains low.

The Bank’s forecasts for growth in the Australian economy are largely unchanged. The central forecast is for GDP growth to pick up and to average around 3 per cent over the next few years. Business conditions are positive and capacity utilisation has increased. The outlook for non-mining business investment has improved, with the forward-looking indicators being more positive than they have been for some time. Increased public infrastructure investment is also supporting the economy. One continuing source of uncertainty is the outlook for household consumption. Household incomes are growing slowly and debt levels are high.

The labour market has continued to strengthen. Employment has been rising in all states and has been accompanied by a rise in labour force participation. The various forward-looking indicators continue to point to solid growth in employment over the period ahead. The unemployment rate is expected to decline gradually from its current level of 5½ per cent. Wage growth remains low. This is likely to continue for a while yet, although the stronger conditions in the labour market should see some lift in wage growth over time.

Inflation remains low, with both CPI and underlying inflation running a little below 2 per cent. In underlying terms, inflation is likely to remain low for some time, reflecting the slow growth in labour costs and increased competitive pressures, especially in retailing. CPI inflation is being boosted by higher prices for tobacco and electricity. The Bank’s central forecast remains for inflation to pick up gradually as the economy strengthens.

The Australian dollar has appreciated since mid year, partly reflecting a lower US dollar. The higher exchange rate is expected to contribute to continued subdued price pressures in the economy. It is also weighing on the outlook for output and employment. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.

Growth in housing debt has been outpacing the slow growth in household income for some time. To address the medium-term risks associated with high and rising household indebtedness, APRA has introduced a number of supervisory measures. Credit standards have been tightened in a way that has reduced the risk profile of borrowers. Housing market conditions have eased further in Sydney. In most cities, housing prices have shown little change over recent months, although they are still increasing in Melbourne. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. Rent increases remain low in most cities.

The low level of interest rates is continuing to support the Australian economy. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.