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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Bloxo: RBA to hike on terms of trade lift

Another hopeful report today: For an inflation-targeting central bank, wages growth matters. Indeed, the two key empirical models that the RBA uses for forecasting inflation both have wages and the labour market as key inputs. The first is a ‘Phillips’ curve’ model, which suggests that as the unemployment rate falls, and spare capacity in the

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Goldman: RBA to hike three times in next year

Man, this is some really hopeful shit: The outlook for wages growth 1. The extended model’s forecasts: Annual growth to rise towards ~+2.8% by 4Q2017 Looking ahead, our extended version of the RBA’s wages model provides a strong signal that growth is at a positive inflexion point. Specifically, underpinned by the lagged effect of the

6

As the great mining bust resumes, what have we got left to fight it?

From late 2011, MB warned the RBA and Treasury against its wrong-headed plan to catapult the Australian economy over the mining bust by blowing a new housing bubble. One of the reasons for our caution was the fear that authorities may be forced to tighten into the bubble before the mining bust was over, and

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RBA minutes turn dovish

From Bill Evans: The minutes of the Monetary Policy meeting of the Reserve Bank Board on April 4 contained some significant changes from the previous minutes for the March meeting. Of most importance has been the final sentence in the section Considerations for Monetary Policy – “the Board judged that developments in the labour and

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If Citi is any guide, macroprudential 2.0 is going to misfire

Via the AFR on new lending changes from Citi: It is believed that other major lenders are planning similar announcements over coming weeks. …The major changes, which were notified to mortgage brokers last Thursday, will be a ban on interest-only loans for: All non resident loans; Loans reliant on foreign income; Loans requiring Foreign Investment

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Does the RBA understand what it’s taken on in household debt?

From Bill Evans of Westpac today: Given the Reserve Bank’s intense concentration on stability issues, including the introduction of new guidelines from APRA, the April Stability Review is of particular interest. Our interest is twofold. Firstly to gauge the degree of concern with which the Bank views the current risks and secondly whether it has

30

Shame Oliver joins “don’t buy now” movement

Suddenly it’s a movement, via the AFR:  AMP Capital chief economist Shane Oliver has backed fellow economist Chris Richardson advice that young Australians consider renting rather buying a home in the current cycle. Speaking to the Australian Financial Review, Mr Oliver said Mr Richardson’s advice was “totally right” given that rental yields were at record

1

Childish “bondcano” gets punished

One of the more childish sell-side phrases that’s been bandied about for the past year is the so-called “bondcano”. I’ve pointed out many times the fallacy of the phrase and today it’s getting the treatment. US bond yields are getting thumped as the commodities boomlet deflates: I expect to see short-end yields rise further with the

8

JPM: Macroprudential 2.0 will hit house prices

Via AFR: “It is likely that overall mortgage lending will slow, as the acceleration in non-interest-only owner-occupier lending needed to offset the drags from macro-prudential tightening seems implausibly large…because lending, particularly in the investor category, has been key to driving housing market activity… The drag on genuine new housing transactions is clear, and could take some

3

Previewing CPI

From Deutsche: Our pick for Q1-17 headline CPI is for a 0.6%qoq/2.2%yoy outturn. We expect the average of the core measures to print at 0.4%qoq/1.8%yoy. We see headline CPI printing at 0.6%qoq in Q1-17 (due 26 April), and for the average of the core measures to print at 0.4%qoq. Despite an apparent rise in wholesale

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The Great Australian Property Crash has begun

Drop your linen and start your grin’n, the Great Australian Property Crash has begun. Why so? Regulators have declared war on the Australian property specufestor and he is going to be hunted to extinction. From ASIC yesterday: Mr Medcraft refused to be drawn on what the answers were to the housing dilemma in Sydney and

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RBA monetary policy “exhausted”, yield spreads crack

Via the AFR comes the usually excellent Alex Joiner: “We’ve brought forward all the housing consumption we can – that’s reflected in debt,” said IFM Investors chief economist Alex Joiner. “And that debt has accumulated rapidly, ahead of incomes.” Unlike many other advanced economies that hit the wall after the 2008 global financial crisis, Australian

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RBA holds, warns on bubble

From the Bubble Managers: At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent. Conditions in the global economy have improved over recent months. Both global trade and industrial production have picked up. Labour markets have tightened in many countries. Above-trend growth is expected in a number of advanced economies,

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Dumb Bubble passes the point of no return

The Australian operates in bizarro world today: Australia’s growing dependence on borrowing to buy and build homes has prompted warnings the economy faces a serious shock, increasing the pressure on regulators to act carefully before further tightening the screws on the fragile property market. …Economist Saul Eslake told The Australian yesterday: “A house price fall

9

Yawn: Pointless RBA shadow says hold

From the pointless RBA shadow: Australia’s major banks raised mortgage interest rates, citing an increase in global financing costs. Coupled with an unexpected rise in the domestic unemployment, low inflation, and a dearth of other economic news, the CAMA RBA Shadow Board remains convinced that the cash rate should remain at its current level. It

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Could energy inflation drive rate hikes?

The absolute madness of the energy crisis is on display today as Morgan Stanley mulls inflation pass-through to food: Energy costs are escalating rapidly in Australia which we think will lead to cost pressure and potentially a return of food inflation. Consumers will also face higher energy costs, which could dampen sentiment, in our view. The