From the AFR: CBA, the nation’s biggest mortgage lender, is raising rates for the second time in two weeks and reintroducing some fees. The bank is set to announce an increase of 47 basis points, or a rise to 4.73 per cent, on its three-year “special rate” investment loans. The rate on its owner-occupied “special rate” loan
Australian interest rates are set by the Reserve Bank of Australia, an independent body established in 1959. It is guided by an inflation targeting regime that seeks price stability in the 2-3% consumer price index band. The RBA originally also governed prudential policy but following several large scandals and bankruptcies in the late 1990s that role was separated into a discrete entity titled the Australian Prudential Regulation Authority.
The RBA is widely well-regarded despite a recent history of buried corruption allegations and a board of business rent seekers that, in more ethical nations, would not have their hands anywhere near monetary policy levers.
In 1990, Australian interest rates were set at 17.5%. But during the Great Moderation, interest rates consistently fell alongside inflation and oscillated in a band between 1.5% and 7.5%.
Owing to an endowment of resources that proved very attractive to China during the Global Financial Crisis, Australian interest rates did not fall to the lows experienced in other developed markets. Indeed, Australia was the first developed market to raise interest after the crisis though it has subsequently had to lower them again as the commodity boom subsided.
During the 2000s, Australian interest rates began to be influenced by external economic pressures much more than previously. This process was driven by the huge offshore borrowing of Australia’s big four banks in wholesale markets. As their offshore liabilities ballooned, the banks were increasingly exposed to the vicissitudes of far flung markets and investors. This reached a head in the global financial crisis of 2008 when banks faced much higher demands from offshore investors for better risk-adjusted returns, forcing them to break with the Australian cash rate in setting local interest rates.
Ever since, Australian bank have regularly adjusted lending and deposit interest rates unilaterally and independently around the cash rate set by the RBA. These interest rates moves were a constant source of political friction as politicians sought to protect the Australian property bubble.
In 2015, Australian interest rate policy was forced to return to a defacto shared responsibility arrangement between the RBA and APRA. With the lowest interest rates in fifty years, the Australian property bubble inflated to new dimensions even as a global yield trade drove up the value of the Australian dollar, threatening economic growth. Eventually the solution found was to apply macroprudential policy to some mortgage lending so that interest rates could be lowered to take pressure off the currency.
MacroBusiness was the most accurate forecaster on Australia interest rates in the market from 2011 forward. It predicted both the turn in rates downwards in 2011 and has had the most dovish outlook ever since. It also lead the debate around, and implementation of, macroprudential tools in 2014. MacroBusiness covers all apposite data and wider analysis of these issues daily.
Form Phil Lowe’s Friday apperance in Parliament: Mr THISTLETHWAITE: In May 2016, the ABC reported that there was an internal RBA briefing note under FOI that said, ‘Any change which discourages negative gearing may be good from a financial stability perspective.’ Is that still the view of the bank? Dr Lowe : The main point
From Peter Martin: The head of the Reserve Bank has dashed hopes of a further cut in interest rates, pleading for people to “focus on other things other than quarter of a per cent moves in the cash rate”. Appearing before a parliamentary inquiry in Sydney governor Philip Lowe said the Australian economy was set
Bit of a Freudian slip today from RBA chief Phil Lowe in parliament: One area that we are watching closely is the cycle in residential construction activity, as the upswing has helped support the economy over recent years. The rate of new building approvals has slowed, but there is a large amount of work still
Via Banking Day: APRA will insist on more consistent rules on the assessment – and reassessment of borrowers over loan serviceability, a measure intended to bolster other rules that, in effect, may restrain credit growth. In guarded language in a letter to all banks and ADIs yesterday, the Australian Prudential Regulation Authority said a revised
After yesterday’s suggestion that a brick would do as good a job as Phil Lowe at the RBA owing political sensitivities, Goldman Sachs offers this chart on central bank independence: The Goldman piece was about highlighting how the US Fed doesn’t actually have that many legal protections if Trump decides to test his powers. I
Via the ABC: Reserve Bank governor Philip Lowe has revealed the central dilemma the Reserve Bank confronts — it would like lower interest rates to boost the economy, but it cannot cut rates because it would add further fuel to the hot Sydney and Melbourne property markets. Dr Lowe delivered the reality check at the
In a news speech today RBA head Bubble-o-Phil compares the Australian and Canadian bubbles: Australia and Canada – Shared Experience Thank you for inviting me to address this year’s Australia-Canada Leadership Forum. It is a real pleasure for me to be here. The original plan for this session was to have Bank of Canada Governor,
From Bill Evans at Westpac: As expected, the minutes of the February monetary policy meeting of the Board of the Reserve Bank provided little additional insight to the Governor’s post-meeting statement and the February Statement on Monetary Policy. The surprise 0.5% decline in real GDP in the September quarter attracted considerable discussion although it has
From UBS: ABS will introduce the 17th series of the CPI in 2H17 The ABS typically reweights the CPI every 5-6 years, with the 17th series due to be introduced in 2H17. The upcoming reweight will adjust the expenditure shares of CPI to the latest household expenditure survey. This ‘corrects’ the positive substitution bias (i.e.
A nice note here from Bill Evans at Westpac: For the last two weeks, I have been in the US visiting investors; hedge funds; corporates and officials. I still have more meetings to complete, including with other Fed officials, but I would like to set out some assessments so far. It will come as little
From NAB via Forexlive today: Say the RBA will cut in November from the current 1.5% to 1.25% Previously the NAB were forecasting an RBA rate cut in June and September of 25bps each time NAB reasoning (in brief): Economic activity likely to be solid as we enter 2017 Real GDP in Q4 2016 likely at 0.9% q/q
Via Martin North: Today the CBA has announced changes to some mortgage rates: interest only home loan rates for investors will rise by 12 basis points and Viridian Line of Credit (VLOC) products will increase by 4 basis points. The new interest only standard variable rate for investors will be 5.68% per annum, VLOC will
From Domainfax: Macquarie Bank property borrowers will have to disclose their spending on everything from footy to fashion under tough new credit rules about to be introduced. Borrowers seeking a loan will be asked for details on their spending in 12 separate categories covering household and discretionary spending to asses eligibility for a loan. The
Via David Uren: The IMF has urged the Reserve Bank to slash rates in a much more pessimistic analysis of the outlook than presented in the bank’s latest forecast, arguing the economy is at risk of getting caught in a Japanese-style low inflation and low growth trap. The fund presents extraordinary modelling showing the Reserve
Oh dear! Via the AFR: Bankwest is set to rock the $1 trillion mortgage market and more than 1.5 million property investors by axing negative gearing benefits that drive lucrative residential property investment, particularly in Melbourne and Sydney. The bank – owned by Commonwealth Bank of Australia, the nation’s largest mortgage provider – will announce on Monday that generous
From Bloxo: The tailwind is here. Higher commodity prices are boosting national incomes and the numbers are large. Export values rose by a strong 32% y-o-y in December which drove the largest trade surplus on record. This is driving a strong rise in mining profits and tax revenues. The debate is about whether the lift
“Backbone” Phil as I call him yesterday delivered the most forceful hold in interest rates that I can recall in weak circumstances: Conditions in the global economy have improved over recent months. Business and consumer confidence have both picked up. Above-trend growth is expected in a number of advanced economies, although uncertainties remain. In China,
From Westpac’s Bill Evans: As expected the Reserve Bank Board decided to hold the overnight cash rate unchanged at 1.5%. The commentary in the Governor’s statement was a little more upbeat than had been the case in December. In particular the global view has been lifted from global growth “lower than average” to “growth above
No hint of easing here: At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent. Conditions in the global economy have improved over recent months. Business and consumer confidence have both picked up. Above-trend growth is expected in a number of advanced economies, although uncertainties remain. In China,