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RBA’s Lowe Lashes Out at Australian Banks for Risky Home Lending

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  • RBA’s Lowe Lashes Out at Australian Banks for Risky Home Lending

Australia’s central bank Governor Philip Lowe rebuked the nation’s banks over lax lending practices and warned regulators are prepared to consider further prudential measures to steps announced last week.

“Too many loans are still made where the borrower has the skinniest of income buffers,” Lowe said in the text of a speech to a Reserve Bank of Australia board dinner in Melbourne Tuesday. “In some cases, lenders are assuming that people can live more frugally than in practice they can, leaving little buffer if things go wrong.”

The RBA chief also signaled that government should do more: law makers have failed to release land, encourage residential development and build transport infrastructure in a way that would have allowed Sydney and Melbourne to absorb their rapidly expanding populations without triggering runaway prices.

“Nothing increases the supply of well-located land like good transport links,” Lowe said. “Under-investment in this area is one of the factors that has pushed housing prices up. Put simply, the supply side simply did not keep pace with the stronger demand side. The result has been higher prices.”

The RBA itself is caught in a policy paralysis: unable to cut rates despite rising unemployment, weak wage growth and anemic inflation; and unable to pop an east coast housing bubble with policy tightening because the rest of the economy is too weak to absorb the shock. Lowe has instead kept rates unchanged at a record-low 1.5 percent since taking the helm in September to support a transition from mining to services and manufacturing.

Jobs Weakness

The governor also highlighted the weakness in the nation’s labor market, as he did earlier in the day when the RBA left rates unchanged. Conditions remain “pretty soft,” employment growth is slow and wage growth “the lowest in some decades,” he said.

“We will want to see an improvement here before we can be confident that growth in the overall economy is strengthening,” the governor said.

But it was housing that dominated the address as he sounded the alert over related debt that “is high” and “rising.” In the past 12 months, such debt increased 6.5 percent compared to a 3 percent gain in household income, he noted. Australia is in uncharted territory here: while the population has racked up large debt for more than a decade, it’s previously been inflated away to some extent by rising consumer prices and wage gains.

“Slow growth in wages is making it harder for some households to pay down their debt,” Lowe said. “For many people, the high debt levels and low wage growth are a sobering combination.”

No Principle

Lowe took issue with the amount of interest-only loan approvals — they accounted for almost 40 percent of new loans in the past year. Australia is “unusual” by international standards in borrowers not having to pay any principle of such loans for a period, he said, adding tax breaks only increase their appeal and subsequent investment in residential property. The present government has refused to close these breaks. The opposition Labor party, which is leading in polls, has pledged to do so.

The Australian Prudential Regulation Authority said last week that interest-only loans should account for no more than 30 percent of new loans. It also said lenders should place strict limits on such loans when they involve high loan-to-valuation ratios.

“A reduced reliance on interest-only loans in Australia would be a positive development and would help improve our resilience,” Lowe said. “With interest rates so low, now is a good time for us to move in this direction. Hopefully, the changes might encourage a few more people to think about the merit of taking out very large interest-only loans when interest rates are near historical lows.”

The Limits

Lowe noted the limits of prudential measures, saying the underlying driver of the housing market remains supply and demand. He acknowledged credit availability “can amplify” demand.

The governor, who chairs the Council of Financial Regulators that brings together APRA, the RBA, the Australian Securities & Investments Commission and the Treasury, said the body would continue to assess how the system responds to the additional prudential measures.

“It would consider further measures if needed,” he warned. “As I have said, though, in the end addressing the supply side of the housing market is likely to prove a more durable way of dealing with the concerns that people have about debt and housing prices than detailed supervisory guidance.”

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

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Naira

Naira Stabilizes at N415/$1 at Official Fx Window

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Naira - Investors King

The Nigerian currency has continued its trend of closing at N415 per dollar, after it settled to close at that price (which it has closed at consistently since Friday) on Tuesday. This is according to data gathered from the Investors and Exporters window where the Naira is traded officially.

It seems to appear that the Naira has found its resting place at this price, considering the number of days at which it has closed at that particular price. It is now left to see how this currency will trade closer to the festive period.

However, this ‘stability’ cannot be held as a permanent thing, because for this price to be the new normal, it may have to be maintained over a longer period of time. The Central Bank of Nigeria should be making moves to bring the value of the naira back up again, to make things better for Nigerians and Nigeria especially as we approach the Christmas period.

The FMDQ group’s updates of the Spot and Forward exchange rates showed slight changes here and there, with nothing too heavy. The Spot rate did not see any changes from Monday, as it maintained the high of N405 per dollar and a low of N465.97 per dollar.

The Forward rate however witnessed a jump, with Tuesday’s high jumping back to N411 per dollar from N452 per dollar where it sat on Monday. The lowest of the Forward rate further fell to N457 per dollar from the N453 per dollar where it was on Monday.

Those who would benefit the most from Tuesday’s trading round are those who agreed on future deals at prices between N411 and N415 per dollar.

The daily turnover recorded by the FMDQ group on Tuesday sat at $152.98 million, more than $100 million less than the $256 million which Monday recorded.

On Tuesday, the parallel market saw the Naira trade at N565 per dollar. The Central Bank has however stated that it does not reckon with the parallel market.

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Forex

CBN Decentralises Form A, Introduces e-Form A to Improve Invincible Transactions

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Godwin Emefiele - Investors King

In an effort to improve access to foreign exchange and facilitate invincible forex transactions, the Central Bank of Nigeria (CBN) has decentralised access to Form A by introducing an electronic version, e-Form A, for all.

The CBN disclosed this in a circular titled ‘Automation of Form ‘A’ on the Trade Monitoring System’.

The e-Form A will now replace the hard copy for all invincible transactions, PTA/BTA, medicals, education, other remittances, with effect from Tuesday, 30 November 2021.

Understanding Form A

Form A allows forex customers under the invincible category to purchase/access forex at the CBN or interbank rate to make payments for eligible services as predetermined by the Foreign exchange manual.

Therefore, Form A is a form made available by the Central Bank of Nigeria to pay for foreign exchange transactions and other remittances as stated above.

CBN has now decentralised form A to allow more people to access forex at the apex bank predetermined rate and also for proper monitoring of forex transactions, this will allow CBN better curb forex diversion to ineligible items or restricted items.

Customers are required to have a valid Bank Verification Number (BVN) and pay N5,000 as fee for e-Form A application.

Read the CBN circular “This is to inform all authorized dealers and the general public of the deployment of e-Form ‘A’.

“Accordingly, the e-Form ‘A’ shall replace the hard copy of Form ‘A’ for invincible transactions [PTA/BTA, medicals, education, other remittances etc.]with effect from November 30, 2021.

“Consequently, all authorized dealers are required to ensure that the processing of Form ’A’ shall only be done electronically on the Trade Monitoring System accessible at www.tradesystem.gov.ng.

“The general public is required to obtain a valid Bank Verification Number (BVN) from their authorized dealer Banks. The BVN is a prerequisite for customers to access the Trade System for e-Form ‘A’ application.

“The e-Form ‘A’ is web-based and allows the general public to initiate the Form from their offices/homes and submit same to the authorized dealer bank.

“A charge of N5,000 (Five Thousand Naira) as fee per declaration of e-Form ‘A’ is applicable with effect from November 30, 2021, and henceforth. There will be a direct debit from the processing bank’s current account for each declaration which should be recovered the charge on the customer by the bank. However, customers for the e-Form ‘A’ should be separated from other bank charges.”

“All hard copies of Forms ‘A’ established on or before November 2 2021 (prior to the commencement of the e-Form ‘A’) shall be utilized within 15 working days of the establishment of the Form.

“For the avoidance of doubt, all established hard copies of Forms ‘A’ for which disbursement had not been made within the transition period of 15 working days shall be deemed cancelled.

“All authority dealer banks are enjoined to inform their customers of the development for compliance.”

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Naira

Naira Maintains Stability at Official Fx Window

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500 and 1000 naira bills (Nigerian currency)

The Naira maintained its streak on Monday, settling to close at N415.07 per dollar. This is the same price at which the Nigerian currency has closed for the last few days, according to the Investors and Exporters window where the Naira is traded officially.

While there have been very marginal differences in the opening prices over the last days, in the end the currency has come around to settle down at the same price (N415.07 per dollar) at the close of each day.

On Friday, the Naira opened at N413.71 per dollar which represented a 0.03% change from the previous day, according to the Investors and Exporters window. On Monday, the currency opened at a similar price, starting the day off at N413.75 per dollar.

Although there have been minimal changes in the opening prices, generally the currency opens at similar prices, with backgrounds of N413 per dollar and changes of only a few kobo.

While the general opening and closing prices didn’t witness much change, the same cannot be said for the Spot and Forward rates. On Friday, the Spot rate was between N404 per dollar and N444 per dollar. However, Monday saw a significant change in the Spot rate. Across all transactions that occurred on Monday, the naira reached a high of only N405 per dollar (N1 lower than Friday’s high), and went on to reach a low of N456.97 per dollar (N12 lower than the previous day).

The Forward rate – for future transactions that were agreed upon on Monday – saw a more significant change. Friday’s Forward rate high was recorded at N411 per dollar, but on Monday that fell greatly to N452 per dollar. However, Monday’s Forward rate lowest was N453 per dollar, about N2 better than the N455 per dollar at which it traded on Friday.

The total turnover of the dollar recorded on Monday sat at $256.69 million. This was considerably higher than the turnover of $215 million that was recorded on Friday.

At the parallel market on Monday, the Naira fell to close at N569 per dollar from the N560 per dollar at which it traded the previous day. After that exponential rise to about N535 per dollar, the parallel market is seeing the Naira return even closer to the N575 per dollar price at which it had sat for a while.

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