The Reserve Bank of Australia’s likely 0.5 percentage point interest rate rise in August will completely knock out the Aussie housing market.
, the states’ funding task for FY23 falls from the most recent budget estimate of $75.6 billion to just $64 billion. That is, the five largest states have exactly $10 billion less debt to issue in FY23 compared to their official numbers only a month ago. The $64 billion of issuance in FY23 is also a striking reduction from the $93 billion issued in FY22 and the $98 billion supplied in FY21.
This is because they lose $140 billion of liquid assets after the Australian Prudential Regulation Authority’s decision to shutter the banks’ lucrative Committed Liquidity Facility, which, and then another $188 billion of liquid assets once they repay the money they borrowed from the RBA under the Term Funding Facility. Balance sheet growth and bond maturities off the RBA’s balance sheet also drive additional bank demand for liquid assets.
Despite this extremely positive demand and supply, the states have had to wear an enormous increase in their cost of debt funding, which has more than tripled. The first driver has been the spike in Australia’s 10-year Commonwealth bond yield, which was around 1 per cent last year and has since leapt to about 3.5 per cent.
The RBA had explicitly backed this commitment by fixing the interest rate on the 2024 Commonwealth bond at 0.1 per cent, the same level as its target cash rate. But in October 2021, it suddenly decided to stop defending this “peg”, which was arguably the most humiliating experience for a central bank since George Soros rolled the Bank of England in the early 1990s.
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