christopher kent : financial conditions and the australian dollar recent developments address by mr christopher kent, assistant governor ( financial markets ) of the reserve bank of australia, to the xe breakfast briefing, melbourne, 15 february 2019. * * * i thank david jacobs for excellent assistance in preparing these remarks. introduction thanks to xe for the opportunity to be here in melbourne to speak to you. a lot has happened in financial markets globally and in australia since late last year. i thought it would be helpful to summarise the key developments, including revisions to the global economic outlook, concerns about downside risks and changes to market expectations for monetary policy paths. i'd also like to discuss their implications for the australian economy and the australian dollar. but first, a brief caveat is in order on the topic of exchange rates. it's often said by reserve bank staff that we are not in the business of forecasting exchange rates. but, just as importantly, we also need to be humble when explaining the past behaviour of exchange rates. in that regard, it is worth recognising that models of exchange rates provide only rough estimates of the more enduring relationships. the international backdrop after a lengthy period of relative stability, global financial markets have been more volatile over the past few months. the incoming data from around the end of 2018 was associated with a tightening in financial conditions : global equity prices declined ; corporate credit spreads widened ; issuance of corporate debt eased ; and volatility picked up across most markets ( graph 1 ). and in the space of only a couple of months, the market's expectations for monetary policies changed markedly and there was a notable downward shift in yield curves. graph 1 1 / 11 bis central bankers'speeches what prompted these changes? in part, market participants reassessed their expectations for global growth. this reflected a run of data that was a bit weaker than had earlier been expected, particularly for the industrial sectors and trade. however, this was not true of all of the incoming data. indeed, labour markets have remained in good health ; the us labour market data of late have been especially strong. moreover, labour market tightness is evident more broadly and wages growth is picking up in a range of advanced economies. forecasts for growth of global economic activity have been revised lower, but only marginally. in late january, the imf's forecasts for global growth were trimmed for 2019 and 2020, by 0. 2 and 0. 1 percentage points,

a liquidity issue has risen may well be a signal that the market has concerns about solvency. hence the central bank certainly should pay heed to that signal from the market. but the experience of the past few years demonstrates liquidity crises can arise because of uncertainties that can be exacerbated by funding structures which are heavily skewed to the short term. in keeping with my argument thus far, in my opinion, it behoves the central bank to look through those uncertainties to the underlying asset quality of the institution under question, and be prepared to lend secured against quality assets if the situation warrants. this is particularly true when there is systemic uncertainty. that is, counterparty risk aversion increases. such instances have arisen on a number of occasions in recent years. as i have said before, in those circumstances, the central bank acts not so much as lender of last resort, but as intermediary of last resort. 2 participants in the market are uneasy about lending to each other at any price, secured or unsecured, because of concerns about the solvency of the counterparty. the central bank can refrain from participating in the risk aversion and intermediate this process across its own balance sheet, thereby ameliorating the tensions created by the shortage of liquidity in the market. together with the provision of liquidity, there may also be a need for the central bank, or prudential regulator, to provide information about the quality of banks'balance sheets to reduce the uncertainties that pervade. one could characterise the stress tests conducted in the us in the middle of 2009 as an example of this. moreover, by providing the liquidity ( against collateral ), the central bank is indicating its confidence in the solvency of the institutions that can be reinforced by this provision of information. these issues are also covered in stevens g ( 2008 ), “ liquidity and the lender of last resort ”, seventh annual sir leslie melville lecture, rba bulletin, may, pp 83 – 91. debelle g ( 2009 ), “ some effects of the global financial crisis on australian financial markets ”, finance professionals forum, sydney, 31 march. bis central bankers ’ speeches the final aspect of bagehot's statement is that the lending should be at a high rate. 3 but a higher rate than what? a relevant benchmark is the rate at which the central bank provides liquidity in its normal operations. in