RBA Kohler: Closely monitoring risk premiums to determine if asset prices look “reasonable”

The Reserve Bank of Australia will closely monitor risk premiums to determine whether assets are being priced “reasonably”, particularly in times of record low-interest rates, said domestic market head, Marion Kohler. “Asset prices rise when risk-free rates are low,” Kohler said in a speech on Tuesday, which is part of a currency delivery mechanism. “The bank bond spread is at its lowest level in roughly more than a decade, but it’s hard to say if that’s consistent with fundamentals.”

Key Points

– Asset prices rise when risk-free rates are low, which is part of the currency delivery mechanism.

– Bank bond spreads are nearing their lowest level in more than a decade, but it is difficult to say that they are in line with fundamentals.

– Another avenue for an RBA is to potentially refinance the bank with a low-cost line of credit that expires around September 2023 and around June 2024.

– Banks can solve this problem in a number of ways, including deposits and issuing bonds.

She also noted that the equity risk premium measure was “in the typical range”. The Reserve Bank of Australia (RBA) has maintained interest rates at an all-time low of 0.1% over the past 12 months and has made it clear that it is likely to remain ultra-bear in the coming years. Low borrowing costs have boosted the country’s housing market, raising fears that politicians are fueling an asset bubble. Another focus of the RBA, Kohler said, is to potentially refinance cheap lines of credit to banks that expire in September 2023 and around June 2024. Kohler said banks can address this problem in a number of ways, including deposits and bond issuance.

“If a bank were to issue new debt instead of emergency financing during its quarterly maturities, it would require quarterly disclosure at an asset ratio not seen in ten years,” she said. However, he said, “Consolidated banks have announced plans to issue bonds  or switch to ‘pre-financing ahead of the TFF’s scheduled maturity date.”

Market Reaction:

• AUD / USD traded at 0.7230, up 0.12% on the day.
• AUD/USD consolidates losses over 0.7200 of RBA Kohler, low yield