(15 March 2022 – Australia) As central banks commence dismantling enormous quantitative easing programs exacerbated by COVID, the Russian invasion of Ukraine and associated volatility in global commodity and financial markets, CBA investigates how drastically these events will alter monetary policy tightening expectations in G20 economies
CBA’s economics team maintains its expectation of a first increase in the Australian cash rate by the Reserve Bank of Australia (RBA) in June 2022. It is “plausible” the cash rate will rise from just 0.1 percent in 2022, Reserve Bank of Australia Governor Philip Lowe said at the Australian Financial Review’s Business Summit this week, but asserted the only thing that’s certain is uncertainty. As inflation surges globally the rationale for an increase in historically low interest rates in many countries remains following the Bank of England (BoE) already hiking rates in the United Kingdom UK) and a rapid succession of hikes projected by the Federal Reserve in the United States.
The BoE monetary policy committee voted 8-1 to increase its base interest rate by 0.25 percentage points to 0.75 percent, as it seeks to slow inflation which has been intensified by Russia's invasion of Ukraine. The Federal Reserve voted this week to raise its key interest rate one-quarter of a percentage point, its first increase since 2018, and signalled that it expects to lift the rate to nearly two percent by the end of 2022.
These significant dynamics are playing out in capital markets and will undoubtedly alter the cost of funding, with credit spreads already widening materially and yields trending higher. The ending of the RBA’s Term Funding Facility for banks is another contributory factor placing upward pressure on funding costs.
Currently there is an estimated US$85 trillion in global non-financial corporate debt outstanding according to Bank for International Settlements (BIS) data and the cost of servicing this debt is going up over time. Could this siphon money away from the critical investment needed to support the transition to net zero?
CBA’s view is that the sustainable finance market is now an embedded focus for both borrowers and investors, and that over time it will likely become indivisible from mainstream finance. Bloomberg data reveals over US$1.6 trillion in sustainable debt instruments were issued globally in 2021, bringing the total outstanding market to over US$4 trillion. In Australia, sustainable bond issuance grew from US$12 billion in 2019 to US$20 billion in 2021, totalling US$50 billion of sustainable bonds outstanding in the domestic market representing roughly two percent of the total bond market in Australia. CBA estimates the Australian sustainable bond market has the potential to grow to US$350 billion by 2032 to help support the achievement of transition targets.
“There is an evolving understanding that the transition must be financed and that harder transition stories can be supported, providing the issuer commitment is genuine. Investors want to see transition plans that can deliver significant impact and are achievable, given their accountability to unit holders” commented CBA Executive General Manager of Global Markets, Chris McLachlan.
“Globally the sustainable finance market has grown ten times since 2016 and increased by up to three times in size in 2021 alone, driven by the sustainability-led agendas of issuers and the growth of ESG mandates among institutional investors” McLachlan added.