At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.
The global economic expansion is continuing. A number of advanced economies are growing at an above-trend rate and unemployment rates are low. Growth in China has slowed a little, with the authorities easing policy while continuing to pay close attention to the risks in the financial sector. Globally, inflation remains low, although it has increased in some economies and further increases are expected given the tight labour markets. One uncertainty regarding the global outlook stems from the direction of international trade policy in the United States.
Financial conditions remain expansionary, although they are gradually becoming less so in some countries. There has been a broad-based appreciation of the US dollar over recent months. In Australia, money-market interest rates are higher than they were at the start of the year, although they have declined somewhat since the end of June. These higher money-market rates have not fed through into higher interest rates on retail deposits. Some lenders have increased mortgage rates by small amounts, although the average mortgage rate paid is lower than a year ago.
The Bank’s central forecast for the Australian economy remains unchanged. GDP growth is expected to average a bit above 3 per cent in 2018 and 2019. This should see some further reduction in spare capacity. Business conditions are positive and non-mining business investment is continuing to increase. Higher levels of public infrastructure investment are also supporting the economy, as is growth in resource exports. One continuing source of uncertainty is the outlook for household consumption. Household income has been growing slowly and debt levels are high. The drought has led to difficult conditions in parts of the farm sector.
Australia’s terms of trade have increased over the past couple of years due to rises in some commodity prices. While the terms of trade are expected to decline over time, they are likely to stay at a relatively high level. The Australian dollar remains within the range that it has been in over the past two years.
The outlook for the labour market remains positive. The vacancy rate is high and other forward-looking indicators continue to point to solid growth in employment. Employment growth continues to be faster than growth in the working-age population. A further gradual decline in the unemployment rate is expected over the next couple of years to around 5 per cent. Wages growth remains low. This is likely to continue for a while yet, although the improvement in the economy should see some lift in wages growth over time. Consistent with this, the rate of wages growth appears to have troughed and there are increased reports of skills shortages in some areas.
The latest inflation data were in line with the Bank’s expectations. Over the past year, the CPI increased by 2.1 per cent, and in underlying terms, inflation was close to 2 per cent. The central forecast is for inflation to be higher in 2019 and 2020 than it is currently. In the interim, once-off declines in some administered prices in the September quarter are expected to result in headline inflation in 2018 being a little lower than earlier expected, at 1¾ per cent.
Conditions in the Sydney and Melbourne housing markets have continued to ease and nationwide measures of rent inflation remain low. Housing credit growth has declined to an annual rate of 5½ per cent. This is largely due to reduced demand by investors as the dynamics of the housing market have changed. Lending standards are also tighter than they were a few years ago, partly reflecting APRA’s earlier supervisory measures to help contain the build-up of risk in household balance sheets. There is competition for borrowers of high credit quality.
The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. 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.
The RBA released their credit aggregates to June 2018 today. Overall credit grew 0.3% in the month to $2.84 trillion, up $9.7 billion. to a new record.
Within that, owner occupied housing lending rose 0.6% or $6.6 billion to $1.18 trillion, while investment lending fell $800 million, down 0.1% in seasonally adjusted terms, or rose $1 billion, up 0.2% in original terms. (I have no idea what adjustments the RBA makes, its not disclosed!).
Investment lending fell to 33.5% of the portfolio. Total lending for housing is a new record $1.77 trillion, and remember this is at a time when housing debt to income is knocking on the 200 door, and we are one of the most in debt nations on the planet. Least we forget, loans need to be repaid, eventually!
Business lending in seasonal terms rose 0.4%, up $4.1 billion to $921 billion, and fell to 32.2% of all lending – we see a continued fall in the proportion of lending to business, as opposed for housing, which is not good.
Personal credit rose $600 million, up 0.4% in original terms or fell $300 million in seasonally adjusted terms down 0.2%.
The monthly seasonally adjusted numbers highlight the slide in investor lending, and the stronger owner occupied lending.
Finally, we also estimate the growth in on-bank lending, by taking the original RBA data, and comparing this with the ADI data from APRA also out today.
In essence, the relative share of home lending going to the non-banks is rising, to around 7% of all loans, and the bulk of the loans being written are for owner occupied borrowers.
A caveat here, as the non-bank segment of the data will always be a bit off, because there is less timely data captured from this small, but growing part of the market. Something which APRA needs to address.
So more of the old same old, same old, housing lending still growing way above inflation and wages, forcing housing debt higher, at the expense of business investment.
We have not fundamentally addressed the credit elephant in the room. Despite all the noise.
Perhaps the regulators would like to tell us, how much debt is too much? We clearly have not hit their pain threshold yet, despite the rising financial stress in many households.
When we released our mortgage stress report for June 2018, we said that the number of households exposed to risks is rising, and if rates were to increase then around 1 million of households will fall into stress and some may default, up from 970,000 now.
Members held a detailed discussion of the high level of household debt in Australia, informed by a special paper prepared for this meeting. Household debt has increased by more than household income over the preceding three decades in many countries, but particularly so in Australia. Two key drivers of this trend across countries have been the decline in nominal interest rates, predominantly reflecting lower inflation, and financial deregulation, both of which have increased households’ access to finance. Members noted that a distinguishing feature of the Australian housing market is that the bulk of dwellings are owned by the household sector. This has contributed to greater borrowing for housing by households in Australia compared with other countries, where the corporate sector owns a larger proportion of rental properties. Another feature of the Australian housing market that has contributed to greater borrowing by households is the higher cost of housing in Australia on account of a larger share of the Australian population living in urban centres, typically in large detached dwellings.
Survey data indicate that much of Australian household debt is owed by higher-income and middle-aged people, who tend to have more stable employment and often larger savings buffers. However, members recognised that a material share of household debt is held by lower-income households, which generally have higher debt relative to their income. Household assets in aggregate are valued at around five times the value of household debt and total assets exceed the value of debt for most households. Members noted, however, that most household assets are housing and superannuation, and that both of these are illiquid.
Members noted that high levels of household debt could affect economic outcomes. For example, households with high debt levels are more vulnerable to economic shocks and therefore more likely to reduce consumption in the face of uncertainty about their future income. Members also noted that changes in interest rates have a larger effect on disposable income for households with high debt levels, but that these households may be less inclined to borrow more at times when interest rates fall. Accordingly, members agreed that household balance sheets continued to warrant close and careful monitoring.
In fact our research says, yes, debt is a problem, and it is hitting many different types of household, including more affluent ones.
Our analysis of stress and defaults created a stir in the media, several radio and TV interviews, and some interesting discussions on social media.
One of these, with Peter on Twitter led to a question about how we make our assessment and scenarios and our definitions of mortgage stress (cash-flow based). We include estimates of expected wages growth, inflation, cpi, interest rates etc.
So this led to a discussion where I volunteered to run a scenario using Peter’s parameters.
We also added in the tax changes and child care subsidy (in both scenarios). We do not impose a particular family structure, but capture that in our surveys (which aligns to the ABS census distribution).
So, we ran our model with a 3% wage growth, 2.1% CPI and small rise in mortgage rates. Stress levels would begin to fall, but will still be higher than since 2000, because of the greater leverage and debt burden.
Here are the results, one year down the track.
So the impact of potential wages rises, in real terms is significant. A “good outcome!” However even then the risk in the system remains higher than we have been use to. Defaults reduced by 6% while stress fell by more than 8%.
Dwelling investment has gone from making a positive contribution to growth two years ago to being roughly flat over the year to March. In terms of our forecasts, dwelling investment is not expected to contribute much to growth over the next couple of years, but is expected to remain at a high level.
To understand the outlook, it is helpful to recognise that there isn’t a single national housing market. At the state level, there have been some similarities in the evolution of dwelling investment, but there have also been distinct differences (Graph 5).
Graph 5
One point of similarity is that the construction of higher-density apartments has been much more important than in the past, especially in the east-coast capitals. We have used our liaison program quite extensively to understand how to adapt our forecasting processes to take into account that the time taken for a building approval to progress to construction and the period of construction is longer and more variable for high-density projects than for detached dwellings. The liaison program, which includes organisations such as the UDIA and its members, has also allowed us to gain deeper insights into specific local factors, such as differences in planning rules and the emergence of capacity constraints in the housing construction sector.
One point of difference across states has been the timing of dwelling investment cycles. For New South Wales and Victoria, the level of dwelling investment has been broadly stable at a high level since 2016. In contrast there has been a decline in higher-density construction in Queensland since early 2017. In Western Australia, residential construction peaked in mid 2015, which was well after the end of the mining boom. These differences highlight the fact that there are different demand and supply forces at work across the states. Given time constraints, I am going to focus my attention on the demand side of the market.
An important driver of housing demand over the long run is the rate at which new households are being formed. This depends on population growth and changes in the average number of people who are living in each household. Household size declined steadily in Australia between 1960 and 2000 before levelling out, alongside declines in marriage and fertility rates and population aging. The natural increase in the Australian population has also declined over time due to demographic factors. In particular, lower fertility rates have offset increased life expectancy (Graph 6). Having said that, the rate of natural increase in Australia’s population remains higher than in most other advanced economies.
Graph 6
Immigration has also been a feature of the population growth story and it has certainly been the dominant influence on the swings in population growth over the past decade. The largest single category of net overseas migration has been people on temporary student visas (Graph 7). Prior to the financial crisis, a large share of these students were coming to Australia for vocational training courses. Following changes to visa requirements, student visa numbers initially dropped, but have picked up again in recent years, mostly due to an increase in students attending university. To put this into perspective, education now accounts for around 10 per cent of Australia’s total exports, which is in the same ball park as our rural exports. From the perspective of demand for housing, the important point is that most of these students have gone to Sydney and Melbourne.
Graph 7
Another interesting category is skilled workers. The net inflow of people on skill visas increased in response to demand for workers during the mining boom. Most of these workers went to Western Australia and Queensland. At the same time, net migration to Western Australia and Queensland from other states and New Zealand also increased. As the mining sector transitioned from the construction to the production phase of the mining boom, the demand for labour fell. The number of people on skilled visas fell and the inflow of people from New Zealand and other Australian states turned to an outflow.
As a consequence, there have been quite large differences in population growth at the state level, which have had direct effects on the demand for housing (Graph 8). Population growth is expected to remain strong, particularly in Victoria and New South Wales, and the net overseas migration component of this is expected to be driven by people on student visas.
Graph 8
On the supply side, the pipeline of residential construction that has been approved, but not completed remains high in New South Wales and Victoria (Graph 9). There is also a reasonable pipeline of work in Queensland, although it has already started to decline. Based on recent approvals data and expected demand conditions, this suggests that dwelling investment in New South Wales and Victoria will remain at a high level for a number of years. Liaison contacts have suggested to us that capacity constraints in the construction industry, particularly in New South Wales, will make it difficult for construction activity to increase.
Graph 9
Of course household formation and population growth are not the only drivers of housing demand. For example, interest rates and changes in lending standards can also influence how much households are willing and able to spend on housing. Another way to gauge the current balance of housing supply and demand is to look at housing price growth.
Over the past five years, housing price growth has been subdued in Brisbane and Perth (Graph 10). This is consistent with the fall in population growth coinciding with an increase in the supply of housing. In contrast, housing price growth has been strong until recently in Sydney and Melbourne, where population growth has been strong. Given that housing accounts for around 55 per cent of total household assets, we are paying close attention to these developments.
Graph 10
The Housing Market in the Illawarra Region
From a demand perspective, the Illawarra region has experienced a pick-up in population growth. Some of this has come from overseas students attending the University of Wollongong, and some has come from people migrating to the Illawarra region from Sydney. Although the Illawarra region is a little older, on average, than the rest of Australia and Sydney, it still has a large working-age population (Graph 11).
Graph 11
This is partly because its geographic proximity and transport infrastructure allow people living in Wollongong and the Illawarra region to commute to Sydney. Around 20 per cent of Wollongong workers commute at least 50 kilometres to work (Graph 12). This is one of the highest rates in the state. Unsurprisingly, five of the seven areas with higher shares of people commuting more than 50 kilometres are also within commuting distance of Sydney. Illawarra residents are also well placed to benefit from the fact that some of the fastest growing areas of Sydney are in south and south-west, including the proposed “aerotropolis” around the new airport at Badgery’s Creek. Access to these growth areas will be enhanced if some of the recently announced transport infrastructure plans are realised.
Graph 12
Although people from the Illawarra region can and do commute to Sydney, labour market conditions in the Illawarra region itself have also been strong recently (Graph 13). In combination, these factors mean that there has been strong employment growth for those living in the Illawarra region over the past five years and the unemployment rate is close to the average for New South Wales, which is, in turn, lower than the Australian unemployment rate.
Graph 13
Strong population growth and the economic prosperity associated with strong labour market outcomes have led to higher housing prices in the Illawarra region (Graph 14). Just as in Sydney, developers have responded to the higher prices, and dwelling investment in the region has increased. Also similarly to Sydney, there has been a debate about whether the infrastructure has been growing fast enough to accommodate the needs of an expanding population and the increase in construction that goes with that.
Graph 14
Conclusion
In summary, over the past couple of years, non-mining business investment has become a more important driver of growth in the Australian economy. This is a good thing because investment of this kind is necessary to ensure future productivity growth, which is ultimately what contributes to the economic prosperity and welfare of the Australian people. Infrastructure investment has been a part of this story.
At the same time, dwelling investment growth has eased off. Although dwelling investment is still expected to remain at a high level, particularly in New South Wales and Victoria, it is not likely to contribute much to growth over the next couple of years. Demand for housing remains strong because population growth is expected to stay strong. However, the housing story is different across states and across regions within states, partly because population trends differ. The effects of the mining investment cycle on population trends and housing markets in Western Australia is a clear-cut illustration of this point.
The data show that population trends and housing market developments in the Illawarra region are closely linked to those in Sydney, partly because the transport infrastructure allows people to live in the Illawarra region and commute to Sydney. Future transport infrastructure plans and the development associated with the Badgery’s Creek airport are likely to strengthen these ties. As always, the key to effective urban development is high-quality, transparent cost-benefit analysis of potential infrastructure projects informed by local knowledge. The UDIA has an important role to play here. The UDIA and its members, in Wollongong and elsewhere, also have an important role to play in macroeconomic policy by informing the Bank’s understanding of the factors at play in different housing markets through our liaison program.
The RBA updated their E2 Household Finances – Selected Ratios to end March, released at the end of June. So they are yet to reflect the latest downturn in home prices and rising debt. But the trajectory is clear and should be ringing alarm bells.
First the ratio of household debt to housing assets and total assets is going up, reflecting mainly falls in property prices. The rate is accelerating, confirming that while debt is still rising, values are not. Expect more ahead.
The ratios of assets to income are falling, having been rising for year, again reflecting falls in home prices. So while incomes are flat in real terms, asset values are falling faster.
And finally, the killer, the household debt to income ratios continues higher, this despite the greater focus on lending quality, and reduced “mortgage power”. The household debt to income ratio is now at 190.1, the housing debt in income 140.1, and the owner occupied housing debt to income is 106.7. In fact this is moving up more sharply as lenders have focused on owner occupied lending.
Combined this shows the problems in the household sector. No surprise then that mortgage stress is going higher. We release the June data tomorrow.
Remember that the debt to GDP ratio is highest in Australia compared with other countries.
The RBA has released their monthly decision and no surprise, we remain at 1.5%. The tenor of the announcement, to me at least sounded less bullish, and I am sure the economists will the parsing the sentences for clues as to their next move. No hint of the next move being up!
To me it is simple, they would like to lift rates to more normal levels, but cannot thanks to high debt, and downside risks. They are stuck. I believe the next move will be down as the economy weakens (dragged down by the fading property market, rising interest rates internationally, and concerns about China’ economic dynamo). But not yet.
At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.
The global economic expansion is continuing. A number of advanced economies are growing at an above-trend rate and unemployment rates are low. The Chinese economy continues to grow solidly, with the authorities paying increased attention to the risks in the financial sector and the sustainability of growth. Globally, inflation remains low, although it has increased in some economies and further increases are expected given the tight labour markets. One uncertainty regarding the global outlook stems from the direction of international trade policy in the United States. There have also been strains in a few emerging market economies, largely for country-specific reasons.
Financial conditions remain expansionary, although they are gradually becoming less so in some countries. There has been a broad-based appreciation of the US dollar. In Australia, short-term wholesale interest rates have increased over recent months. This is partly due to developments in the United States, but there are other factors at work as well. It remains to be seen the extent to which these factors persist.
The recent data on the Australian economy continue to be consistent with the Bank’s central forecast for GDP growth to average a bit above 3 per cent in 2018 and 2019. GDP grew strongly in the March quarter, with the economy expanding by 3.1 per cent over the year. Business conditions are positive and non-mining business investment is continuing to increase. Higher levels of public infrastructure investment are also supporting the economy. One continuing source of uncertainty is the outlook for household consumption. Household income has been growing slowly and debt levels are high.
Higher commodity prices have provided a boost to national income recently. Australia’s terms of trade are, however, expected to decline over the next few years, but remain at a relatively high level. The Australian dollar has depreciated a little, but remains within the range that it has been in over the past two years.
The outlook for the labour market remains positive. Strong growth in employment has been accompanied by a significant rise in labour force participation. The vacancy rate is high and other forward-looking indicators continue to point to solid growth in employment. A gradual decline in the unemployment rate is expected, after being steady at around 5½ per cent for much of the past year. Wages growth remains low. This is likely to continue for a while yet, although the stronger economy should see some lift in wages growth over time. Consistent with this, the rate of wages growth appears to have troughed and there are increasing reports of skills shortages in some areas.
Inflation is low and is likely to remain so for some time, reflecting low growth in labour costs and strong competition in retailing. A gradual pick-up in inflation is, however, expected as the economy strengthens. The central forecast is for CPI inflation to be a bit above 2 per cent in 2018.
Nationwide measures of housing prices are little changed over the past six months. Conditions in the Sydney and Melbourne housing markets have eased, with prices declining in both markets. Housing credit growth has declined, with investor demand having slowed noticeably. Lending standards are tighter than they were a few years ago, with APRA’s supervisory measures helping to contain the build-up of risk in household balance sheets. Some further tightening of lending standards by banks is possible, although the average mortgage interest rate on outstanding loans has been declining for some time.
The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. 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.
The RBA data shows that total housing lending rose 0.37% from last month, up $6.6 billion to $1.76 trillion. Within that, owner occupied housing rose 0.55% or $6.5 billion, and investment lending rose just 0.02% or $220 million. Personal credit fell again, and business lending fell 0.3% down $2.5 billion to $917 billion, all seasonally adjusted.
Investment lending made up 33.5% of all housing loans, down from 33.7% the previous month, and continues to slide, as expected. However the drop in business credit meant the proportion of commercial lending fell to 32.4% of all lending.
The monthly growth trends show the fall in business lending, and the fall-off in investor lending, all seasonally adjusted, which in the current environment may well be writing the volumes down too far.
The 12 month rolling trend shows owner occupied housing still running at 7.9%, well above inflation and wage growth, while investor lending has a read of 2%, which is the lowest see since the RBA series started to be published in 1991. Have no doubt, investor lending is fading.
Personal credit dropped an annualised 1.3%, the largest fall since the fall out from GFC in 2009. Business lending was around 3.8% annualised and slid a little.
Finally, the non-bank contribution to lending growth can be imputed by subtracting the APRA ADI data from the RBA market data. This is an inexact science because of timing and coverage issues across the data. But it tells an interesting story, with non-bank growth rates sitting at around 20% for owner occupied loans and around 18% for investor loans, on a twelve month rolling basis. So we can see where some of the slack in the system is being taken up as non-banks flex their muscles. Regulation of this sector is a concern, as Moody’s highlighted recently. APRA has this responsibility, but how actively they are looking at this segment of the market, when data is so hard to acquire is a moot point. My guess is they are light on.
He described the basics of Crypto, with reference in particular to Bitcoin, compares it with money, and concludes that many of these shortcomings of cryptocurrencies stem from their design around trustless distributed ledgers and the costly proof-of-work verification method that is required in the absence of a trusted central entity. In contrast, in situations where there are trusted central entities in well-functioning payment systems, there may be little need for cryptocurrencies.
He then goes on to explore the implications for central banks.
The Bank has been watching developments in these areas for about five years. Currently, however, cryptocurrencies do not appear to raise any major concerns for the Bank given their very low usage in Australia. For example, it is hard to make a case that they raise any significant concerns for the Bank’s mandate to promote competition and efficiency and to control systemic risk in the payments system.
Nor do they currently raise any major issues for the Bank’s monetary policy and financial stability mandates. There are only very limited links from cryptocurrencies to the traditional financial sector. Indeed, many financial institutions have actively sought to avoid dealing with cryptocurrencies or cryptocurrency intermediaries. So, it is unlikely that there would be significant spillovers to the broader financial system if cryptocurrency holders were to suffer valuation losses or if a cryptocurrency system or intermediary was compromised.
But given all the interest in cryptocurrencies or private digital currencies, people have inevitably asked whether central banks should consider issuing digital versions of their existing currencies. I can give you an indication of the Bank’s preliminary thinking on this issue, as outlined in December by the Governor in a speech entitled ‘An eAUD?’.
Currently if households wish to hold money, they have two choices. They can hold physical cash, which is a liability of the Reserve Bank, or they can hold deposits in a bank (or credit union or building society), which is an electronic form of money and is a liability of a commercial bank that is covered (up to $250,000) by the Financial Claims Scheme. Both forms of money serve as a store of value and a means of payment (assuming the bank deposit is in a transaction account).
Most money is already ‘digital’ or electronic in form. Currency now accounts for only about 3½ per cent of what we call broad money. The remaining 96½ per cent is bank deposits, which we might call commercial bank digital money.
Furthermore, the use of cash by households in their transactions has been falling in recent years. This next graph shows there has been strong growth over an extended period in the use of cards and other forms of electronic payments. In contrast, the dots, which are from the Bank’s Consumer Payments Survey, show a significant fall in the use of cash. In 2007, cash accounted for nearly 70 per cent of the number of household transactions. Nine years later, this had fallen to 37 per cent.
Clearly, some households are moving away from cash and finding that electronic payments provided by banks better meet their needs. And this trend is likely to continue as the New Payments Platform (NPP), which launched recently, allows banks to offer better services to households – namely real-time electronic payments that give immediate value to the recipient, are easily addressed, are available 24/7 and carry lots more data than currently.
So the question is: ‘should the Reserve Bank introduce a new form of cash – an eAUD as the Governor called it – to give households an electronic payment instrument issued by the central bank for their everyday payments?’
Our current thinking is that there would not necessarily be all that much demand for an additional form of money in normal times, though this would presumably depend partly on design decisions such as the interest rate (if any) that would be paid on this money.
But to the extent that there was significant demand, particularly if this occurred at times of financial uncertainty with households switching out of the banking sector, there could be significant implications for the Bank’s financial stability mandate. There would also be implications for the structure of the financial sector – for example, it could result in reduced financial intermediation. We would need to think through these implications carefully.
So for the time being at least, consideration of a possible new electronic form of money provided by the Reserve Bank to households is not something that we are actively pursuing. Based on our interactions with our counterparts in other countries, it is also not front of mind for most other advanced economy central banks. An exception is Sweden, where the shift away from the use of cash is significantly more advanced than in Australia and elsewhere. Sweden’s Riksbank is studying the issues regarding the possible issuance of an e-krona and expects to report by late 2019.
However, as the Governor indicated in December, there might be a stronger case for considering a new form of central bank liability for use by businesses and financial institutions.
Here it is important to remember that the Reserve Bank already offers electronic balances to financial institutions in the form of Exchange Settlement Accounts (ESAs) at the Reserve Bank. These balances can be passed between financial institutions during the banking day, with the Bank keeping the official record (or the ledger) of account balances.[10] A key function of ESAs is that they provide banks with a risk-free liquid asset for settling payment obligations through the day, to prevent the build-up of large exposures that could threaten financial stability.
However, some stakeholders in the payments area – including some fintechs – have expressed the view that the introduction of another form of central bank balances could be quite transformative. They have suggested the issuance of a new form of digital money that would be accessible to businesses and could be passed around on a distributed ledger. They argue that the availability of another form of central bank settlement instrument could reduce risk and increase efficiency in business transactions. For example, it could allow the simultaneous exchange of money and other assets on blockchains. A central bank digital currency on a blockchain could potentially also enable ‘programmable money’, involving smart contracts and the simultaneous execution of complex, linked transactions.
Moving in this direction would involve two major changes to current arrangements: it would involve the introduction of a new form of settlement asset and it would presumably involve broader access to central bank money for non-bank institutions. Consideration of the first aspect will require an assessment of issues relating to the technology. Consideration of the second aspect would get into some of the issues that are relevant to thinking about giving households access to electronic central bank money, namely the implications for financial stability and the structure of the financial sector.
As we think more about a model along these lines we will be considering whether the benefits could be equally well facilitated by other means. For example, could there be commercial bank money on blockchains – say Bank X tokens, Bank Y tokens, and the like, rather than RBA digital settlement tokens? Indeed, some models have been sketched out whereby commercial banks would put aside ESA balances at the central bank or would put risk-free assets into special-purpose vehicles, and then issue credit-risk-free settlement tokens for use by their customers. We will also need to think about whether the possible use-cases that have been proposed really need central bank money on a blockchain, or if they might also be possible using other real-time payment rails – perhaps the NPP. At the moment, it does not appear that a strong case has emerged for us to provide this new form of central bank money, but we have an open mind.
