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 should cut straight to zero

Via the AFR today: Economists at QIC, Laminar Capital and Bank of America Merrill Lynch argue that since November better than expected jobs numbers, retail trade figures, house prices and approvals, and more optimistic trade and sharemarket news will see the Reserve Bank hold fire, despite the temporary hit to the economy from bushfires. …Former

0

UBS: Deleveraging pulse intact, RBA to cut

Via the excellent George Theranou at UBS: Following coordinated policy easing by APRA & the RBA, home loan values rebounded 18% in the 6 months to November, seeing home prices lift >10% annualised, moving quickly towards our ‘mini-boom’ forecast of 10% y/y, especially with the RBA to keep easing. However, we still think ‘this time

8

Gottiboff: Bushfire boom imminent!

Gottiboff is excited: There is increasing evidence that Reserve Bank Governor Philip Lowe and his people are significant contributors to the increase in pessimism by so many Australians. …Now bushfire relief and recovery has given the government a justifiable reason to spend that surplus and more. The big bushfire spending proposals of the federal government

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Amusing bonds price in rate hikes

Because that’s how good the global and Australian recovery will be in 2020. Bonds have just about completed pricing the first rate hike: This is largely being driven by global steepening as stocks run wild: But is has also been the result of local bonds selling faster than US, narrowing the spread: A few checks

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APRA punishes Westpac

Via Martin North: The Australian Prudential Regulation Authority (APRA) has today formally commenced an investigation into possible breaches of the Banking Act 1959 by Westpac Banking Corporation (Westpac). APRA will focus on the conduct that led to the matters alleged last month by AUSTRAC, as well as the bank’s actions to rectify and remediate the

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RBA: Banks need to derisk offshore borrowing

Has the RBA been hacked or what? More sense from The Bulletin from Kellie Bellrose and David Norman: Abstract Australian banks access large and deep foreign funding markets to supplement their domestic funding. Looking at the major banks’ worldwide operations, such offshore funding accounts for about one-third of their assets. This funding is raised in

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CEOs hose RBA hurdle rate clap trap

Via the AFR: “As a result of lower long-term interest rates our cost of capital has naturally lowered over recent years,” Medibank chief executive Craig Drummond told The Australian Financial Review’s annual Chanticleer CEO poll. “Nevertheless, those lower interest rates have elevated asset prices, making inorganic investment more challenging.” Tabcorp chief executive David Attenborough backed this

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Countdown to QE4?

Via Credit Suisse: The Fed’s liquidity operations have not been sufficient to relax the constraints banks will face in the upcoming year-end turn. Reserves are still insufficient; there are no true “excess” reserves; and large U.S. banks’ G-SIB scores are shaping up to be a severe binding constraint heading into the year-end turn. We have

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UBS: No fiscal coming, RBA forced to cut

Via the excellent George Tharenou at UBS: Treasurer Frydenberg will soon release the Commonwealth Budget update (MYEFO), likely on December 16. Positively, the Final Budget Outcome for 18/19 already beat April’s Budget estimate by a significant $3.5bn (UCB basis), with the $0.7bn deficit outcome (i.e. ~’balanced’) the smallest since the GFC. Furthermore, monthly data for

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Australian dollar and bonds fade Lunatic RBA optimism

Phil Lowe and the RBA’s toxic optimism rolls on: says GDP outcome was broadly in line with our expectations weakness of consumption was a surprise still confident people will spend extra income says evidence is people will spend tax rebates, may take longer this time says weakness of Q3 consumption does not have particular messages

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Bill Evans: Weak growth trashes RBA and Budget outlook

Via Bill Evans of Westpac: The Australian economy grew by a disappointing 0.4% in the September quarter for annual growth of 1.7%. Of most concern is that this represents the fifth consecutive quarter where private final demand, which declined by 0.3% in September, either contracted or was flat. Within private final demand the most surprising

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RBNZ drops $20bn capital requirement on Aussie banks

Bravo RBNZ again: The Reserve Bank of New Zealand today released its final decisions following its comprehensive review of its capital framework for banks, known as the Capital Review. Governor Adrian Orr said the decisions to increase capital requirements are about making the banking system safer for all New Zealanders, and will ensure bank owners have

3

Lunatic RBA botches start to unconventional policy

In his recent speech describing unconventional policy options, Governor Phil Lowe noted that: The fourth policy response was forward guidance. This took two forms: calendar based and state based. Under calendar-based guidance, the central bank makes an explicit commitment not to increase interest rates until a certain point in time. Under state-based guidance, the central

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Mwahaha: Citi hikes mortgage rates

Via Banking Day: Citibank is facing a backlash from politicians and consumer groups this morning after moving to claw back recent home loan rate cuts from new borrowers. In a controversial move that undermines the Reserve Bank’s efforts to relieve pressure on household budgets and boost spending in the economy, Citi yesterday became the first

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RBA & APRA thrilled with low mortgage property bubble

Those looking for imminent macroprudential will be disappointed I fear. From the Council of Financial Regulators: Financing conditions and the housing market. Council members discussed trends in credit and recent developments in the housing market. Growth in housing credit remains subdued overall, with credit to investors particularly weak. Owner-occupier loan commitments and housing turnover in

7

Bill Evans: RBA overconfident of rebound

Via Bill Evans at Westpac: As expected, the Reserve Bank Board decided to leave the cash rate unchanged at 0.75%. The key themes around the policy outlook which have been consistently promoted in these RBA statements in recent months have been repeated today. Firstly, the Board “continues to monitor developments, including in the labour market”,

5

Grenville: Ignore ratings agencies and spend!

At the AFR, monetary curmudgeon Stephen Grneville is making sense: Rating agency Standard and Poors has just issued its usual finger-wagging warning to Australia about the dangers of budget deficits. …The issue of the moment, however, is what to do about an economy which is performing well enough, but growing just a little too slowly

0

Shadow RBA turns more dovish

Having missed every signal under the Sun for as far back as I can remember: Rates Should Stay on Hold Into the New Year The unemployment rate ticked up to 5.3% in October, while real wage growth fell further, to 0.5%. Australia’s inflation rate, at 1.7% in the September quarter, remains below the Reserve Bank

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Budget and RBA confront “material downside” in capex

Via Westpac’s Andrew Hanlan: 2019/20 capex plans Overview Capex plans for 2019/20 have been downgraded, largely led by services. Business capex plans are lopsided, with strength in mining and weakness in services. This is consistent with the fundamentals (a challenging and uncertain global backdrop and weak demand domestically) and consistent with our reading of the