Right on cue in Parliament comes the Governor of the Lunatic RBA: My colleagues and I welcome this opportunity to share our views on the Australian economy and the RBA’s important policy responsibilities. These hearings are an essential part of the accountability process. Two weeks ago, we released our latest forecasts for the Australian economy.
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.
Not least because they point backwards while leading indicators are in the toilet. More from Damein Boey at CS: The unemployment rate remained steady at 5%. Overall, a very strong jobs number. But cold comfort for the RBA, given that employment is a lagging indicator, and the weight of evidence is pointing to a very
Some more heavy hitters join the MB outlook today, via the AFR: Ellerston Capital’s head of global macro, Brett Gillespie, believes there is a solid chance that the Reserve Bank of Australia will cut interest rates sooner than the market expects, and before May’s federal election, to counter the property correction. “My prediction is that
Via Bill Evans at Westpac: The minutes of the Reserve Bank Board meeting for February have largely confirmed the themes which were set out in the February Statement on Monetary Policy. Key to these themes is “the probabilities around these scenarios were now more evenly balanced than they had been over the preceding year when
Via the RBA come minutes: International Economic Conditions Members commenced their discussion of the global economy by noting that growth in Australia’s major trading partners had been above trend, despite moderating in the second half of 2018. Growth in major trading partners was forecast to be around trend in 2019 and 2020. However, the downside
Via The Australian: The Reserve Bank has called on education authorities to help arrest the sharp decline in the number of senior students in NSW studying economics, by elevating the status of the subject within the curriculum. Once the third most popular subject choice for Year 12 students, economics enrolments have plummeted over the past
The warnings of slower services activity spreading from the housing bust continue to mount. We know that Westpac is stalled, BOQ is shrinking, McGrathmageddon and Domainmageddon roll on. But these are obvious, direct casualties. More interesting now are indirect multipliers. There’s SG Fleet for instance: Fleet management provider SG Fleet has posted a 7 per
Goldman yesterday pushed out its rate hike expectations to mid-2020: We still view the most likely scenario as one in which the economy navigates a key risk period over the first half of 2019 and interest rates edge higher over the medium term – albeit somewhat later than we previously forecast. …We have some sympathy
Missed this earlier in the week. Ross Gittins is helping lift Australian economic discourse for once: [A rate cut] isn’t [imminent]. It isn’t because, as he made plain in a speech on Wednesday – and reiterated in the statement on monetary policy on Friday – he remains confident the economy has slowed a bit, but no worse. His revised
Funny stuff in a carrion comfort kind of way, via AFR: Existing owner-occupier variable rates with principal and interest payments will rise by six basis points and those with interest only by 16 basis points. The hikes, which apply from February 21, impact all loan to value (LVR) bands. As mortgages and house prices crash.
George Tharenou at UBS has finally joined MB: Recent data clearly shows that the pace of growth is slowing, with weakness in retail, car sales, resi & non-resi approvals, business surveys, home loans & credit. Indeed, the only major ‘positive’ data print in the last month has been unemployment, & while jobs growth remains solid
Via Damien Boey at Credit Suisse: In terms of the sources of downgrades, the Bank has slightly lowered its outlook for consumption and cut its forecast for residential investment. But it still expects business and public capex to do the heavy lifting. Some other interesting comments from the SoMP include: The RBA’s view that offshore
Via Bill Evans at Westpac before today’s SoMP downgrades: The RBA has started the year with a significant shift, lowering its growth outlook and acknowledging greater uncertainties and downside risks. While the Board still expects the economy to track towards its employment and inflation targets, and does not see a strong case for a near
Funny bastards! February SoMP shredded: Growth shredded by much more than has been previously mooted but still not enough! Then a magical rebound. Check out the new headline inflation number for June 2019 at 1.25%. They’ve covered over this shocker by elevating core inflation. Then another magical rebound! Someone has finally recognised that the data flow
The media is full of the disgraced NAB pair today. I can’t be bothered with their Johnny-come-lately drivel. Here’s the summation from the ABC and suffice to say that Ken Henry and Andrew Thorburn should have resigned long ago: Ken Henry says he and outgoing NAB CEO Andrew Thorburn are “deeply sorry”, after both men
Under the spectacularly misleading title RBA’s ‘neutral’ stance wipes out big four hike calls for 2019, the AFR today serves up a bitter message from the pulpit for Australia’s big bank economists: Westpac, NAB, ANZ and now Commonwealth Bank are now unified in their expectation that there will not be an interest rate hike in
‘Twas a busy day yesterday so I did not have the full opportunity to deconstruct Phil Lowe’s epic roll over to coming rate cuts. It is worth doing because it offers Governor Lowe the chance to learn from his mistakes. It’s in that spirit of generosity that I offer some forecasting and policy process tips
Via the RBA’s chief lunatic, Phil Lowe, just now: Thank you for the opportunity to address the National Press Club. It is an honour to have been invited. The media and the RBA have a special relationship. Most people in the community hear the RBA’s messages through the media. You report on what we say,
CBA’s half year result is out today and it reeks of coming mortgage rate hikes: Unexciting at best: falling revenue; falling ROE; falling NEM; rising bad debts 15bps or $577m (vs consensus 13bp) and NPLs 89bp (vs 85bp) NPAT boosted by cost cutting; dividend stalled and broker write downs ahead. Mortgage rate hikes are inevitable
Policy error is the name of the game at the Australian central bank. Witness: house prices in Australia’s two largest cities are in outright crashes; it is spreading steadily to other capitals; building approvals are crashing coast to coast; infrastructure investment has topped out; credit is swiftly falling towards zero; the NAB business survey has
The lunatic RBA February rates decision is out and it actually has no idea what it is doing: At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent. The global economy grew above trend in 2018, although it slowed in the second half of the year. Unemployment rates in most
George Tharenou at UBS on the Hayne RC and credit flows: Implications: RC still consistent with our view of tighter credit ahead Overall, the RC should not trigger a material acceleration in the tightening of lending standards under way, which should reduce the chance of an imminent ‘credit crunch’. This will likely give some comfort
Via Domain: The Finance Brokers Association is warning the Hayne recommendations could drive up interest rates. The association’s managing director, Peter White, has gone directly to the proposals around mortgage brokers which has also caught the attention of the government. He said eliminating trail commissions for brokers could ultimately push up the price of loans.
The Hayne pain is here. The most important finding for the economy in the final report is the Commission’s view of the Household Expenditure Measure (HEM) on which its find is quite subtle: 1.2.1 The NCCP Act When dealing with particular case studies in the Interim Report, I concluded that there had been conduct that
Weeoo, weeoo, weeoo. The Pascometer is redlining on imminent rate cuts: The “Reserve Bank must cut interest rates” chorus is growing louder. Too bad it’s barking up the wrong policy tree. Or maybe that should be, singing the wrong tune. There are four powerful arguments for economic stimulus, the latest being yet another quarter of
Man, what a pack of muppets! The Shadow RBA: Forecast for 2019 Suggests Cash Rate Should Remain On Hold Australia’s economy has softened, with the growth rate having dropped to 0.3 percent for the September quarter (2.8% annual growth rate) and CPI inflation edging down to 1.8% in the December quarter, below the Reserve Bank
How far down are house prices again? Via The Advisor: The second wave of out-of-cycle rate hikes has continued, with a non-major lender lifting its mortgage rates by up to 18 basis points. ME has announced it will increase its home loan interest rates for both new and existing borrowers by up to 18 basis