Daily Commentary BY THE CURVE TEAM –

RBA Minutes Confirm Baseline Outlook Scenarios

20th of May, 2020

Minutes of the RBA’s May Board meeting released yesterday confirmed their base case estimate for the outlook post Covid-19. Standard and Poor’s (S&P) also released analysis for the mutual banking sector.

As uncertainly around the outlook is still extremely high, the RBA has opted towards more qualitative forecasts over recent months. Given much of the post outlook is entirely dependant on how quickly the economy can reopen and how consumers behave, it simply doesn’t add much value to provide specific numerical forecasts when the range of outcomes is so broad.

The Boards central or baseline scenario is:

“The economy was expected to begin recovering gradually over the second half of 2020. However, the level of output was expected to remain lower – and the unemployment rate higher”

The board noted that much of the extreme volatility in financial markets has dissipated as governments and central banks globally took on extensive stimulus. They noted some stability has returned to credit markets with spreads tightening and bond issuance returning.

For funding markets the board noted:

“In response to the large amount of liquidity in the banking system, Exchange Settlement balances held by banks were high, reducing banks’ need to borrow from each other in the overnight market. Consequently, the cash rate had drifted a little lower, to be around 14 basis points, where market participants expected it to remain for some time.”

The liquidity in the banking sector has been a key factor for deposit markets in recent weeks, spreading across the major, regional and mutual banks.

S&P released some analysis overnight on the mutual bank sector, forecasting credit losses across the sector to be smaller than their larger bank counterparts. The analysis centred around the make-up of the lending books held by many of the key mutuals. S&P indicated that with many of these banks exposed to workers in essential industries, with borrowers employed in Defence roles such as Police, Nurses, Teachers and the like, adding a level of stability in incomes. Additionally, prudential lending has meant borrows have on average lower debt in income ratios:

“In addition, in calendar 2019, 7 per cent of the mutual sector’s new residential lending had a debt-to-income ratio above [six times]. For the major banks, this was 17 per cent.”

S&P indicated that the more traditional banking operations of the mutual sector focusing on residential housing would see little prospect of widespread ratings changes in the near term.

We expect that our issuer credit ratings on Australian mutual lenders will remain unchanged even if we formed a view that there has been a longer lasting but modest rise in economic risks facing these institutions,”

Matthew Dunshea

Client Relationship Manager