As the Australian dollar’s unruly melt-up continues let’s revisit what the RBA said yesterday: At its meeting today, the Board decided to maintain the current policy settings, including the targets for the cash rate and the yield on 3-year Australian Government bonds of 25 basis points. The global economy is experiencing a severe downturn as countries
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.
Via the excellent Damien Boey at Credit Suisse: Credit growth surprises materially to the downside. Bank credit was unchanged in April, compared with the Consensus forecast for 0.6% monthly growth. Year-ended growth slowed to 3.6% from an upwardly revised 3.7%, versus expectations for a pick up to 4% . Compositionally, business and housing credit rose moderately, while personal credit fell. Arguably the
Via the excellent Damien Boey at Credit Suisse: Activity bottoming out. May purchasing managers indices (PMIs) for Australia and major economies reveal a bottoming out process in train. PMIs everywhere are rising sharply off their historical lows. To be sure, PMIs are diffusion indices, meaning that their level corresponds with a rate of change in activity, and sufficiently high readings are necessary to
Via the excellent Damien Boey at Credit Suisse: Fed minutes reveal preference for yield curve control. Minutes from the Fed’s late April meeting reveal that officials were concerned about slow recovery, permanent scars on the economy from the crisis, and a potential second wave of the outbreak. There was no mention of negative interest rates
Via the excellent Damien Boey at Credit Suisse: Real yield curve model points to steepening, but … We define the Australian real yield curve as the 10-year inflation-indexed bond yield minus the real 3-month interbank rate, using the inflation swaps curve to profile long- and short-term inflation expectations. Our proprietary model of the real yield curve
Via the excellent Damien Boey at Credit Suisse: Fed Chair Powell guides negatively. In an ad hoc speech, Fed Chair Powell said that the economy faces unprecedented risks from COVID-19 if fiscal and monetary policy makers do not step up to the challenge. He suggested that the recovery could take time to gather momentum, and that the present liquidity
Via the excellent Damien Boey at Credit Suisse: Mixed April NAB business survey: The NAB survey for April revealed an even sharper decline in business conditions, with the component sum index falling to -34 from a downwardly revised -22. However, the more forward looking, “pure” confidence measure, improved to -46 from an upwardly revised -65, as companies adjusted to
Back to its old tricks with some SoMP scenarios: Scenario 1: baseline – ‘gradual recovery’ This scenario assumes that most of the current domestic containment measures remain in place for most of the June quarter. Most of the restrictions are assumed to have been lifted by the end of the September quarter, aside from the
Via the excellent Damien Boey at Credit Suisse: US money markets pricing in negative rates for the first time. 2020 has been a year of firsts for the US economy. First negative oil prices. Then negative rate pricing. Overnight, the Fed fund futures curve priced in forecasts for negative interest rates by January 2021. The
The titans of Aussie monetary policy, from across the ideological spectrum, have come together with a great idea, at the AFR: The current monetary policy regime in Australia is “inflation targeting” –keeping inflation in a band between 2 per cent and 3 per cent over the cycle. Inflation targeting served Australia well for a long
Statement by Philip Lowe, Governor: Monetary Policy Decision: At its meeting today, the Board decided to maintain the current policy settings, including the targets for the cash rate and the yield on 3-year Australian Government bonds of 25 basis points. The global economy is experiencing a severe downturn as countries seek to contain the coronavirus.
Via Bill Evans at Westpac: On Tuesday the Reserve Bank Governor Lowe made a major speech where he outlined the Bank’s key economic forecasts. These forecasts are based on the Bank’s central outlook for the policy response to the Covid Crisis whereby domestic shutdowns are gradually eased through the June and September quarters and “mostly
Via the excellent George Tharenou at UBS: RBA signal taper, but we see bond buying to avoid upward pressure on yields After we highlighted the RBA’s April meeting flagged tapering of QE bond buying, Lowe went further. He highlighted “Liquidity in the Australian government bond market has also improved substantially”; and “As conditions in the
With the emphasis on broad-based, via The Australian: “What those reports say is … we should be looking again at the way we tax income generation, consumption and land in this country,” Dr Lowe said. “They say we should be looking at how we build and price infrastructure. They say we should be looking at
Oh Captain, my Captain! Phil Lowe at the Reserve Bank of Australia: Good afternoon and thank you for joining us today. When I spoke a few weeks ago, I talked about the importance of building a bridge to the recovery and helping as many people and businesses as possible get across that bridge. Over the
Via Deutsche: By almost any metric Central bank balance sheet expansion in the last few weeks has already exceeded anything seen in the 2008/9 crisis period. In the last six weeks alone, G10 Central banks have expanded their collective balance sheet by $2.7 trillion, and 2/3rds of this comes from the Fed. The Fed has
Via RBNZ: The Reserve Bank is proposing the removal of mortgage loan-to-value ratio (LVR) restrictions in line with the Bank’s financial stability mandate. The proposal is in response to the economic downturn caused by the COVID-19 pandemic. The LVR requirements are one of the macro-prudential tools that the Reserve Bank has available to respond to
Via the excellent Jonathon Mott at UBS: ADIs expected to “seriously consider” deferring decisions on dividends Following recent announcements suspending bank dividends by several global regulators, APRA stated that it expects all ADIs (Authorised Deposit Taking Institutions) and insurers to “limit discretionary capital distributions in the months ahead” and instead use these capital buffers to
Via Banking Day: Canstar reports that CBA has cut the basic variable rate by 18 basis points for owner occupiers paying either principal and interest or interest only and with loan-to-valuation ratios below 70 per cent. The new rate is 2.79 per cent. For owner occupiers paying either P&I or interest only and with an
Zero surprise here. S&P is the only one of the three rating agencies that have much of a clue about Aussie sovereign credit: Australia Outlook Revised To Negative As COVID-19 Outbreak Weakens Fiscal Outcomes; ‘AAA/A-1+’ Ratings Affirmed Rating Action On April 8, 2020, S&P Global Ratings revised the outlook on its long-term ratings on Australia to negative
DXY was down hard last night: The Australian dollar ripped more than everything: Gold failed again: Oil is retracing: Dirt did better: Miners to the moon: EM flamed out: Junk was soft: Bonds too: The Aussie long end puked: Stocks boomed then busted: There were some ‘risk on’ flows that lifted the Australian dollar but
Via Fitch: Fitch Ratings-Sydney-07 April 2020: Fitch Ratings’ downgrade of the Issuer Default Ratings (IDRs) of Australia’s four largest banking groups and their New Zealand subsidiaries to ‘A+’/’F1’ from ‘AA-‘/’F1+’ reflects the agency’s expectations of a significant economic shock in 1H20 due to measures taken halt the spread of the coronavirus, followed by a moderate
From the RBA just now: At its meeting today, the Board reaffirmed the targets for the cash rate and the yield on 3-year Australian government bonds of 25 basis points, as well as the other elements of the package announced on 19 March 2020. The coronavirus remains first and foremost a very major public health issue, but
Banking Day reports on COVID-19 tremors shaking BOQ: What looked to George Frazis a month ago as a core strength of the Bank of Queensland could soon be revealed as a powder-keg on the company’s balance sheet. During a strategy presentation in February, the new BoQ chief identified the bank’s fast-growing business lending operation as
As predictable as the dawn, via Domain: Lenders are revising their lending criteria, with a focus on borrowers considered to be in high-risk industries. “Generally where a customer is in a severely affected industry such as tourism, hospitality or retail, then their loan is declined unless we can prove that their income is unaffected,” says