MNI POLICY: RBA Kent: Little Link Between Deposits, S-T Rates

By Sophia Rodrigues

     SYDNEY (MNI) - The slowing in broad money growth may not be a reason for

the recent funding pressures experienced by banks and the consequent rise in

short-term money market rates, Reserve Bank of Australia Assistant Governor

Christopher Kent said Wednesday.

     Kent gave a speech entitled, "Money - Born of Credit?" as part of the RBA's

topical talks event for educators.

     Below are the key observations we made from the speech:

     --The main takeaway from the speech was that broad money growth has little

relevance to money market rates and as an predictor of economic growth, it is

less useful than credit growth,

     --Kent dismissed suggestions from some commentators that the sharp slowing

in growth rate of money is one of the reasons for the rise in short-term money

market rates in recent months. According to him, there is little evidence to

suggest such a relationship. According to him, a gap between growth of deposits

and credit has been commonplace over recent decades, and conditions in

short-term money market were benign through much of those episodes. He also

pointed to the fact that in recent quarters deposit growth has more than matched

the growth in total assets on banks' balance sheets. Thirdly, retail deposit

rates haven't risen which would happen if banks really did have insufficient

deposit funding.

     --To put this in context, in recent months there has been an increase in

short-term money market rates, mainly due to a widening in the gap between the

overnight cash rate and the bank bill swap rate which is a benchmark rate. The

increase has led to rise in funding costs for banks and as a result three of the

big four banks, and several others announced increase in their variable mortgage

rates. 

     --At the same time that this has happened, broad money growth rate has

slowed significantly -- from 6% in November last year to just 1.9% in July --

the lowest growth rate since September 1992. 

     --Kent also discussed whether the behavior of money can tell us anything

useful about the broader economy. His conclusion was credit growth is a

marginally more useful statistical indicator of the growth of economic activity

than money growth. 

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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