of Australia, when speaking gigs are far less frequent than they used to be. So there was a fair turnout on Tuesday morning when Bloomberg hosted a briefing by assistant governor Chris Kent.
The bank’s interest rate increases are one part of the tightening of monetary policy to more normal conditions. The other part is shrinking the balance sheet it expanded so rapidly in 2020 and 2021. The net effect is that the banks built up enormous hundred-billion-dollar balances on their deposit accounts at the Reserve Bank, which in turn expanded its balance sheet of assets, such as its holdings of Commonwealth and state government bonds. The central bank’s balance sheet peaked at $465 billion.
So after mulling its options, the RBA has opted for a middle ground – which is for the system to have low reserves but for the balances to be ramped up when needed by allowing banks to pledge assets in exchange for funding at the prevailing cash rate. At present, a liquidity crisis is the last thing financial markets are worried about. Typical measures of market anxiety are at their lowest levels in years.The VIX or fear gauge is back at around 13.5 points – which is back to pre-pandemic levels, as are credit spreads, which measure the margin above the risk-free rate that companies pay for debt.
What does Kent say about this? Well, he reminds us that markets can correct themselves when they’re richly priced.