The Australian financial landscape is currently navigating a period of tightening, marked by the Reserve Bank of Australia’s recent 25 basis point hike in the cash rate to 4.35%. The financial markets are bracing for potential further tightening in early 2024. This shift has been mirrored in the near-peaking bank bill swap rates and notable volatility in the bond market.
Amid these changes, Australian banks have judiciously increased lending and deposit rates, though by a margin less than the cash rate hike. This has led to an uptick in mortgage payments, a trend that might continue as fixed-rate loans reach their maturity. Despite these shifts, housing credit growth has shown stability, albeit at lower levels. The housing market itself continues to demonstrate resilience, with modest increases in new housing loans and sustained growth in housing prices.
Amid these changes, Australian banks have judiciously increased lending and deposit rates, though by a margin less than the cash rate hike. This has led to an uptick in mortgage payments, a trend that might continue as fixed-rate loans reach their maturity. Despite these shifts, housing credit growth has shown stability, albeit at lower levels. The housing market itself continues to demonstrate resilience, with modest increases in new housing loans and sustained growth in housing prices.
On the business front, credit growth remains steady, offering a stable backbone to the economic framework. The Australian dollar, in the meantime, has maintained a steady position on a trade-weighted basis, reflecting a balanced market response to the evolving economic scenario.
In the money market, the heightened anticipation of cash rate hikes and the influence of overseas funding costs have led to a rise in Bank Bill Swap (BBSW) rates. This has, in turn, contributed to a widening of the spreads between BBSW and Overnight Index Swaps (OIS). These developments, alongside the strategic issuance of longer-term bills and challenges in sourcing Australian dollar funding, have shaped the current financial contours.
The government bond markets have been agile amidst these fluctuations, with Australian Government Securities (AGS) yields rising, particularly for long-term securities. This uptrend, partly fueled by robust Australian CPI data, has resulted in a steeper yield curve. Despite these dynamics, confidence in the monetary policy’s capacity to rein in inflation within the target range remains strong.
The smooth functioning of government bond markets is evident from the robust demand and minimal bid-offer spreads on AGS and semi-government securities. A notable highlight was the oversubscription of a recent $8 billion, 30-year AGS issue, showcasing strong market confidence.
As the Reserve Bank of Australia continues to support the bond market, there’s a marked decrease in its balance sheet, primarily driven by Term Funding Facility (TFF) maturities. This trend is expected to continue, leading to a significant reduction in 2024, aligning with the maturation of TFF loans and the Bank’s domestic bond holdings.
The maturity of the TFF has led to substantial repayments, influencing higher BBSW rates. However, the impact on overall bank funding costs is anticipated to be moderate.
Bank bond issuance has remained robust, with a significant proportion in the domestic market. The yields on these bonds, particularly for major banks, have aligned with the prevailing market rates, playing a pivotal role in shaping bank funding costs.
The asset-backed securities market, particularly in residential mortgage-backed securities, continues to thrive, supported by favorable market conditions and the engagement of non-banks and smaller banks.
Lastly, deposit growth has slowed, influenced by various factors, including lower credit growth and increased bank bond issuance. This has led to a shift towards higher-yielding term deposits as banks adapt their strategies in response to the changing financial environment.
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