RBA Will Look Closely at Risk Premiums to Detect Asset Bubbles

(Bloomberg) -- Australia’s central bank will closely monitor risk premiums to judge whether asset prices appear “sensibly valued,” especially at a time of record low interest rates, said Marion Kohler, head of the domestic markets department.

“Asset prices increase when risk-free rates are low, and this is part of the monetary transmission mechanism,” Kohler said in the text of a speech Tuesday. “While bank bond spreads are around their lowest level in over a decade, it’s difficult to know whether this is not aligned with fundamentals.” 

She also noted that measures of equity risk premiums were within their “typical range.”

The Reserve Bank of Australia has held rates at a record low 0.1% for the past 12 months and signaled it’s likely to maintain ultra-loose policy for another couple of years. Cheap borrowing costs have sent the country’s housing market soaring, raising concerns that policy makers are fueling asset bubbles.

Kohler said another area of focus for the RBA is the potential refinancing of its cheap funding facility for banks, which will mature around September 2023 and June 2024. Kohler said banks can meet this task in a number of ways, including via deposits and bond issuances. 

“If banks issue new debt to replace Term Funding Facility drawdowns in the quarter of maturity, this would require quarterly issuance as a share of assets at levels not seen in over a decade,” she said. “However, in liaison banks have indicated plans to issue bonds earlier than, or ‘pre-fund,’ scheduled TFF maturities.”

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