By Gareth Aird, head of Australian economics at CBA: Key Points: CBA data indicates the increase in government payments via the “COVID‑19 disaster payment” to households in lockdown states has been bigger than the fall in wages and salaries. Our partial read of household income, which comprises wages & salaries plus government benefit payments, is
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.
Phil Lowe in a speech just now: Monetary policy I would now like to turn to monetary policy, where I will focus my remarks on our bond purchase program and the outlook for the cash rate. First, though, I want to emphasise that the RBA’s package of monetary policy measures is providing ongoing and important
Chris Joye at Coolabah with the note: In the AFR this weekend I write that after months of debate about whether the Reserve Bank of Australia would increase or decrease its stimulus in recognition of the COVID-induced recession, Martin Place delivered on its promise to maintain a “flexible” and open-ended approach to its government bond purchases (aka
Albert Edwards at Societe General with the note: The unravelling Chinese Credit Impulse we highlighted earlier this year accurately foretold the stalling of the global reflation trade. Is this a pause that refreshes or are we in a re-run of a decade ago? For back in 2011 a bubble of reflation enthusiasm burst, and bond
RBA governor Phil Lowe today delivered the Bank’s Monetary Policy Decision, which as expected delayed the taper of bond purchases. Lowe also reiterated that the cash rate will not rise until higher inflation is observed, which will require “materially higher” wage growth than currently: At its meeting today, the Board decided to: maintain the cash
Westpac with the note: Following the stubbornly high Victorian case count and the associated decision by the Victorian government to abandon the zero case objective we have reviewed our growth forecasts for the Australian economy. The Growth Numbers Our forecasting process is based around using our estimates for growth in hours worked in the states
Forex markets are range trading again. Except for the Australian dollar which took flight on RBA hot air. DXY was firm and EUR soft: The Australian dollar made news highs across the board: Commodities were all over the place: But big miners sagged with iron ore: EM stocks jumped: And junk is serene: Despite curve
Nordea with the note: We generally had the feeling that the Jay-Man was a dead man walking within the Fed as Lael Brainard’s style and opinions suited the Biden administration much better than Powells, but suddenly it seems less clear that Brainard will take over the reins next year as Janet Yellen allegedly backs Powell.
For many, many years, the widowmaker trade of global markets was to short Japanese bonds. JGBs were considered vulnerable to a selloff for decades owing to massive budget deficits and notions of rebounding inflation. It never happened. There were occasional wins. But overall it was a one-way bet to nowhere: The same dynamics are emerging
Bill Evans at Westpac is kindly ready with the early payout on my latest winning bet with him on the direction of interest rates as he reverts from hikes to imminent cuts (or, more printing): The Reserve Bank Board next meets on September 7. The Board surprised at its August meeting by deciding to retain
TSLombard with the note: Focus on the taper is understandable but misplaced–the Fed’simpact on this cycle will come from AIT having ended the strong dollar policy. TheFed has moved from using interest rates as needed to stabilize the dollar and sustain foreign capital inflows, to using the balance sheet to offset foreign financing inflows sufficiently
The Australian economy is a simple machine that runs on two motors. The two engines are commodities and household debt. We might call these miners and banks. Or, iron ore and house prices. The machine is fuelled by commodity income derived offshore. This is then leveraged up in global markets via bank borrowing. The debt
In my view we’ll see negative interest rates or renewed TFF before we see “taper” as the terms of trade crash lands on COVID apartheid. UBS with the note: WPI including bonus strangely slowed to ~record-low 0.1% (& only 1.9% y/y) Despite widespread ‘anecdotes’ – including from listed companies and business surveys – the broader
Morgan Stanley with the note: July jobs report delivers evidence of substantial further progress. The rates market took notice and bonds sold off hard with 10-year Treasury yields reclaiming the 200-day moving average. Equity markets took their cue from this move in rates with the Russell2000 up and the Nasdaq down. Cyclicals had their best
The bond yield back-up of the last few days is starting to add some pressure to forex markets. US yields have been running higher since last week super jobs report: But Australia is being left behind as China slows, commodities roll over and NSW sinks deeper into Delta crisis: For the last week, the US
It’s a very strange time. The pandemic we know about. I am referring to a secondary effect. The rise of irrationality in people and policy. I’ve lost count of the number of strange conversations I’ve had in recent times with people I formerly thought of as stable or rational. The trauma of the pandemic has
Some big capitulations from Goldman over the weekend as reflation and commodities bull market fall apart. First, yields: Revised yield forecasts show 10y USTs at 1.6%, 10y Bunds at -0.15% at YE21. Factors currently weighing on yields should fade, allowing for some normalization, though rebound to much higher levels may take longer than previously expected.
CBA’s Gareth Aird with the note. I agree: The RBA has modestly downgraded their assessment of the Australian economic outlook in the near term whilst simultaneously upgrading their view on the Australian economy over the medium term. The RBA’s central scenario sees GDP growth at +4.0%/yr at end-2021 (from +4.75% previously) and the unemployment rate
ABS weekly payrolls are…rolling sharply: Everywhere but led by NSW: It’s a blue recession! These numbers are seasonally adjusted but, let’s face it, it’s what we would expect and it is going to get worse. Given rolling lockdowns across the entire east coast probably until Summer, the glass-half-full RBA is shaping as wrong again.
Roy Morgan has released its Inflation Expectations report for July, which increased to 4.1% – the highest reading since October 2019: In July 2021 Australians expected inflation of 4.1% annually over the next two years, up 0.1% and the highest Inflation Expectations for nearly two years since October 2019. Inflation Expectations are now up 0.9%
An excellent note from Nomura on exactly what we have been discussing for six months: The deviations between the Fed and the market’s economic sentiment and monetary policy outlook have become quite conspicuous, and we think that the two are likely to collide head-on in the near future. At this point, we expect the market
The RBA statement today: At its meeting today, the Board decided to: maintain the cash rate target at 10 basis points and the interest rate on Exchange Settlement balances of zero per cent maintain the target of 10 basis points for the April 2024 Australian Government bond continue to purchase government securities at the rate of $5 billion a
Via the RBNZ this morning: The Reserve Bank of New Zealand – Te Pūtea Matua – will soon begin consulting on ways to tighten mortgage lending standards, Deputy Governor and General Manager for Financial Stability Geoff Bascand says. The action follows the signing of an updated Memorandum of Understanding (MoU) on macro-prudential policy with the Minister
I have pointed out any number of Wall Street strategists that have been wrong about rising US yields this year as they await the inflation boogeyman. They all have their excuses: Bonds were oversold and the recent bid is technical. It’s Delta! It’s Fed buying distorting the market. It’s Japanese selling. So on and so
If macropriudential moves were not already fading on the interminable Sydney Delta outbreak, today’s APRA data pushes it further from sight. The big eight banks lifted specufestor lending to 0.3% monthly for June (with CBA having its own little party): And still only 1.1% year on year: Then there’s Mad Macquarie as usual: Big eight
Stocks may be holding up as Australia sinks into an epic double-dip recession but the bond market is anything but calm. The bid is big and persistent: The curve is being slaughtered: And we’re outpacing offshore leads with negative spreads to the US across the curve Though certainly tracking China. A crushed yield curve should