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MNI BRIEF: Interest Rate Vol To Impact Markets - RBA's Jones

Structurally higher interest rate volatility could threaten the financial system in future, according to Brad Jones, assistant governor (financial system), at the Reserve Bank of Australia.

Speaking at an industry conference, Jones noted a number of factors could contribute to a “regime shift characterised by structurally higher interest rate volatility,” including stagflationary supply shocks, higher and more volatile bond term premium and more price sensitive bond markets.

He said higher interest rate volatility would affect bank duration risk, negatively impact the interaction of interest rate and credit risk, and challenge the functioning of the financial market.

"The post-GFC era of exceptionally low interest rate volatility gave rise to a new generation of investment business models and strategies," he noted. "This includes strategies that involve the procyclical leveraging up of bond positions when volatility dips and assume a negative correlation between bond and equity returns." How these markets function in a regime of higher inflation and interest rate volatility remains uncertain, he added.

Jones noted other risks to future financial markets include potentially faster deposit runs, spillovers from entities that are not individually systemically important, geopolitics, operational risks and climate change.

Daniel covers the Reserve Bank of Australia and the Reserve Bank of New Zealand and leads the Asia-Pacific team.
Central Bank NewsPolicy NewsAPACAustraliaBriefStoryRBARegion
Daniel covers the Reserve Bank of Australia and the Reserve Bank of New Zealand and leads the Asia-Pacific team.
Central Bank NewsPolicy NewsAPACAustraliaBriefStoryRBARegion

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