Australian interest rates

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.

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The RBA must ignore ABS unemployment numberwang

Via FTAlpahville comes a VERY IMPORTANT post for Australia: This is a guest post by Leo Hindery, Jr, a member of the Council on Foreign Relations and formerly CEO of AT&T Broadband and its predecessor, Tele-Communications, Inc. (TCI). He is currently Chairman and CEO of Trine Acquisition Corp., a NYSE-listed company which he founded. The

4

RBA must ignore ABS numberwang

The Australian Bureau of Statistics has joined Australia’s War of Stupid. Recall: For the last few years, that outlook has been a War of Stupid between overly tight monetary policy versus overly tight fiscal policy. The RBA refused to ease for years, demanding instead that Josh Depressionberg spend more on productivity-enhancing investment. Depressionberg pointedly did

4

Lower Australia dollar demands RBA irresponsibility

It’s just awful listening to the lunatically conservative RBA, via yesterday’s minutes: The US dollar had depreciated significantly against the currencies of other advanced economies over recent months, including the Australian dollar. In part, this reflected an unwinding of the earlier appreciation of the US dollar related to an episode of financial market volatility in March and

6

TFF kills RBA cash rate

Via Banking Day: A significant shift in the framework of the Reserve Bank of Australia’s monetary policy is underway that could culminate into the Term Funding Facility becoming the effective instrument for implementing monetary policy and making the cash rate target almost redundant for the next few years. The interest rate corridor system of implementing

16

Morrison Government wins War of Stupid with RBA

Last week was a seminal one for the Australian economy and investment outlook. We now have a clear view of what the post-COVID world will look like from the point of view of Australian policymakers. For the last few years, that outlook has been a War of Stupid between overly tight monetary policy versus overly

15

Fed kills the Phillips Curve

Cross-posted from FTAlphaville: From the June 2017 edition of The Economist: That central banks cannot endlessly reduce unemployment without sparking inflation is economic gospel. It follows from “a substantial body of theory, informed by considerable historical evidence”, according to Janet Yellen, chair of the Federal Reserve. Her conviction explains why, on June 14th, the Fed raised

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The RBA must fight the Fed right now

The US Federal Reserve last night dropped a deflationary bomb on Australia: Following an extensive review that included numerous public events across the country, the Federal Open Market Committee (FOMC) on Thursday announced the unanimous approval of updates to its Statement on Longer-Run Goals and Monetary Policy Strategy, which articulates its approach to monetary policy and

9

Yield spike ahead?

From Barclays: In the US, the resumption in activity has been brought about by the falling number of COVID cases and increasing mobility which bodes well for the outlook. We maintain our recommendation of shorting 20y Treasuries as the improving backdrop argues for lower safe asset premium. With rising uncertainty about the Fed’s reaction function,

11

What will Jackson Hole bring?

The annual Jackson Hole central banking swingers party is later this week. Via FT: Several Fed officials have already expressed a willingness to allow inflation to run above the central bank’s 2 per cent target to make up for prolonged periods of undershooting. In Europe, investors will be looking for any clues about the likely next

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Lunatic RBA property bubble autocrats spew at ABC expose

Amusing stuff, via the ABC: Top brass at Australia’s central bank have hit back at ABC reporting that exposed how the dire view of the housing market held by some Reserve Bank staff clashed with the rosy picture the bank’s representatives presented in public. Staff then sought “receptive” journalists to tell their side of the

9

Lunatic RBA alumnus offers happy clappy drivel

John Edwards at The Lowy Institute: EXECUTIVE SUMMARY Australia is emerging from the pandemic sooner and at less economic cost than widely expected, but with higher unemployment and elevated debt. As the pandemic recedes, it is evident that global output and demand will recover slowly and unevenly. Major advanced economies have sharply increased government debt

12

Tulip departs RBA to praise RBNZ

Via Bloomie comes the eponymous Peter Tulip, ex-RBA: “The evidence suggests that negative interest rates work,” said Tulip, now chief economist at the Centre for Independent Studies — a think tank in Sydney. “Why is the experience of other countries that have successfully used negative interest rates, why is that inapplicable to Australia?” Reserve Bank

7

Bill Evans slams RBA

In his own quiet and elegant way: Recently the Bank has communicated extensively with the market. This has included a major speech from the Governor to the Australian Business Economists; his the semi annual appearance at the House of representatives Standing Committee on Economics; and the August Statement on Monetary Policy. So, it comes as no surprise

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UBS: RBA set for shift to “proper QE” as economy dies

Via the excellent George Tharenou and Carlos  Cacho: Economic outlook deteriorated sharply, amid 2nd wave of COVID & restrictions With the 2nd wave of COVID seeing tighter mobility restrictions in Australia, including an extended ‘State of Disaster’ in Victoria, the economic outlook is deteriorating. Indeed we recently halved Q3 GDP to 0.6% q/q, and still

1

Westpac: Aussie bonds to outperform

Via Westpac: In last week’s biannual parliamentary testimony before the House of Representatives Standing Committee on Economics, RBA Governor Lowe made some specific references important to the bond market. His position on borrowing and budget deficits is quite clear: “By borrowing today to support the economy we are avoiding an even bigger loss of output

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Westpac: RBA Governor casts more light on policy options

From Westpac chief economist, Bill Evans: Today Reserve Bank Governor Lowe made his bi-annual address to the House of Representatives Standing Committee, Economics. His dominant theme is the need to support the economy through job creation. Every policy should be judged on its capacity to boost jobs. His position on borrowing and budget deficits is

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The trivial detail upon which Lunatic RBA optimism hangs

Here it is from Luci Ellis as she spruiks the new dart-throwing forecast: Closure of international borders to most movements of people is affecting Australia’s international trade and will continue to do so over the forecast period. International tourism will be infeasible until borders reopen, and will probably only recover slowly. This will affect both

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Domain hankers for days of rate cuts past

It’s RBA day and Domain is pining for times lost: Increasing real interest rates and Victoria’s stage-four lockdown will force the Reserve Bank to re-examine policy settings and its forecasts for the national economy amid growing evidence the jobs market has deteriorated in the past fortnight. The RBA board is expected to hold official interest

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Exclusive Gerard Minack: MMT the new normal. Get over it

Special report from Gerard Minack: Monetising deficits has started.  Expect it to stay. The helicopters have arrived.  Central banks are printing money to fund expanding government deficits.  I expect them to stay: fiscal will remain the lead instrument for cycle management through the coming expansion, and it will be backstopped by central banks.  Deployed with