Australian banks are to lose about $5 billion in the second quarter as the US dollar’s depreciation and fears about the global economic outlook caused a significant drop in deposits in Australian banks.
Key points:The dollar has lost nearly half its value against the US since November last yearThe US economy has been buffeted by an uncertain global outlook and China’s decision to increase capital controls have exacerbated the problemThe Australian dollar fell by nearly 2 per cent against the dollar last week, its biggest drop in three months, as the Federal Reserve and the Bank of England raised interest rates and US President Donald Trump said he would move to cut taxes.
“This has made the situation worse for banks,” Reserve Bank of Australia Governor Philip Lowe said in a statement.
“The US dollar is now trading at around 65 to 70 per cent of the Australian dollar, which is not much of a gain at all.”
The Federal Reserve has said that it will cut interest rates in the first half of next year and would start to ease monetary policy at the end of March.
The Australian economy has struggled since November and there is concern about the country’s outlook, with the Reserve Bank forecasting a contraction in GDP of 1.1 per cent in the quarter, or 0.6 per cent higher than in the previous quarter.
However, economists have been reluctant to cut rates and some economists have raised doubts about the outlook.
The US Federal Reserve last month cut its key interest rate by a quarter of a percentage point, but that cut was not expected to affect economic activity, and the Federal Treasury cut its benchmark rate by half a percentagepoint.
The Bank of Japan has also cut its rate by one-quarter since November, but the Federal government said the policy would not have a material impact on economic activity.
Australia has about $10 trillion in total assets.
The drop in the value of the US currency is expected to hurt the economies of Australian exporters and service industries, which rely on exports to the US for their revenue.
However many businesses are also reliant on the value added from the services industry, and those industries are dependent on the US to fund capital expenditure.
The loss of US dollars has also hit Australia’s dollar-denominated investment, which has seen the country lose more than $8 billion in 2017, according to the Reserve’s latest report.
It also has hurt its trade balance, which was negative $1.6 billion in May-June 2017 and was negative in the same month last year, according the report.
But the economy has bounced back, growing at an annual rate of 1 per cent over the past three months.
The Reserve Bank said it expected the economy would grow by around 1.5 per cent next year, while the Government has forecast growth of 1 to 1.7 per cent this year.
“The impact of the recent declines in the US will have a significant impact on the outlook for the Australian economy,” Mr Lowe said.
Australia’s biggest banks are likely to be hit particularly hard by the fall in the dollar, with ANZ, Westpac and Westpac Banking Corporation (WBBC) being among the worst-hit banks.
The banks are among a group of banks that account for about half of the economy.
Mr Lowe said there were concerns about the strength of the dollar because it was a “currency risk”, and the impact of any drop in its value would be felt in Australian financial markets.
He said the banks had already identified a range of options, including reducing their lending, and had discussed the possibility of making other changes in the coming months.
The dollar fell 1.2 per cent to 78.99 US cents at 5:37pm AEST (1:37am AEST).