RBA has eye on market pricing post-COVID

Colin Brinsden, AAP Economics and Business Correspondent
(Australian Associated Press)

 

While the health impact from the coronavirus lingers on, volatility in financial markets from the pandemic proved to be brief.

However, the Reserve Bank of Australia is keeping a close eye on market assets and investments to ensure they are being correctly priced after the COVID-19 shock.

RBA head of domestic markets Marion Kohler said concerns around the economic effects of COVID-19 and the associated rise in uncertainty caused a sharp adjustment in securities prices.

“(But) the period of volatility was brief,” she told an online conference on Tuesday.

“Risk premiums have increased in the initial phase by much less than during the global financial crisis, and were elevated for a shorter period.”

She said during the 2008-2009 global financial crisis, volatility in equity prices stayed elevated for several quarters, as did risk premiums for bonds and equities.

“Every crisis is different, so that means you really need to set out with flexibility and tailor the tools for the challenges at hand,” she said in answer to a question at the Australian Securitisation Forum.

“This time around the challenge was really the very low interest rate at the outset of the pandemic.”

When the pandemic hit Australia in early 2020 the RBA’s cash rate already stood at just 0.75 per cent.

While it was subsequently cut to a slim 0.1 per cent, it still meant the central bank had to introduce other measures, such as its bond buying program and its term funding facility that provided cheap loans for banks.

“The RBA’s package of measures has lowered funding costs across the economy and supported the availability of credit for households and businesses,”‘ Ms Kohler said.

In contrast, at the beginning of the GFC the cash rate was 7.25 per cent and was quickly slashed to three per cent, providing a large policy impact.

Ms Kohler said when financial markets don’t function well, it impacts employment and activity.

“So it is really important that policy response is sizeable, coordinated and is quick to shore up confidence,” she said.

However, she has warned that a historically low interest rate environment does raise the prospect of “search for yield” behaviour.

“Investors bid up the price of risky assets to the extent that risk may no longer be adequately priced,” she told the forum.

“This, in turn, increases the risk of a sharp correction down the road. So, it’s important to closely monitor risk premiums to judge whether asset prices appear to be sensibly valued.”

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