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.

14

NZ mulls adding house prices to RBNZ mandate

Via Bloomie: New Zealand’s government has proposed adding house prices to the central bank’s remit to rein in an overheating property market, prompting investors to reduce bets on lower interest rates. The local dollar jumped. Finance Minister Grant Robertson said Tuesday he has written to Reserve Bank Governor Adrian Orr, asking him to consider amending

6

McKibbin talks RBA nonsense

Professor Wazza McKibbin at the AFR today: Former Reserve Bank board member Warwick McKibbin says the central bank’s $100 billion quantitative easing program will not stimulate the economy, but will help stave off a financial crisis if the global outlook takes a turn for the worst. The Australian National University professor said the central bank’s

10

Markets ignore fully doved RBA

Minutes just now: International Economic Developments In their discussion of international economic developments since the previous meeting, members noted that the global economy was in the early stages of recovery following the largest contraction in decades. GDP outcomes in major economies in the September quarter had generally been somewhat better than expected after very large

9

Non-banks dial TFF whaaambulance

Via Banking Day: A leading non-bank mortgage lender has warned that non-banks originating prime mortgages face tough market conditions, largely as a result of the pricing impact of the Reserve Bank’s term funding facility. Firstmac chief financial officer James Austin said non-banks have had the benefit of the Australian Office of Financial Management’s Structured Finance

4

Nikko: RBA at zero for seven years

Via Nikko: For the past six months, the RBA has been subdued at using unconventional policy compared to offshore. After six months of sitting on the sidelines, the RBA has finally eased rates. Chris Rands, Portfolio Manager, Fixed Income at Nikko Asset Management has penned a piece exploring the RBA’s delay to move and ease

15

RBA: Your wage is about to tumble

Via the RBA’s SoMP: Wages growth declined in the June quarter Growth in the Wage Price Index (WPI) slowed to 0.2 per cent in the June quarter, to be 1.8 per cent higher in year-ended terms (Graph 5.14). These quarterly and year-ended growth rates were the slowest in the history of the series. Private sector wages growth slowed to 0.1 per cent

8

Still more on RBA printing

Via Bill Evans at Westpac: As expected the Reserve Bank Board decided to cut the cash rate target from 0.25% to 0.1%; cut the target yield on the 3 year bond from 0.25% to “around” 0.1%; cut the rate on new drawings under the Term Funding Facility from 0.25%  to 0.1%; and cut the rate

6

The full RBA drivel round-up

It’s not quite wall-to-wall RBA drivel but it’s close. The AFR is a monetary swamp, as usual. First up is a waffling Richard Holden: The Reserve Bank of Australia did exactly as it signalled and markets expected by cutting the cash rate to 0.1 per cent and expanding its bond-buying program on Tuesday. Now that

139

RBA cuts, launches QE

From the RBA just now: At its meeting today, the Board decided on a package of further measures to support job creation and the recovery of the Australian economy from the pandemic. With Australia facing a period of high unemployment, the Reserve Bank is committed to doing what it can to support the creation of

19

Is global inflation about to surge?

Via Morgan Stanley: …investors were a bit too complacent on the uncertainty surrounding the election outcome, unlikely passage of a fiscal stimulus before the election and second wave of Covid-19…the short answer is that the worst of the correction is over in our view but we still think the next month is likely to remain

17

MSM piles into QE whaaambulance

Some relatively sensible whinging about QE from the boffins today. First, Adam Creighton: Prosperity is never the gift of ­either fiscal or monetary policy and its supposedly wise practitioners. It’s a consequence of technological progress and more efficient allocation of resources. On the former, we’re hostage to fortune. On the latter, we need much more:

8

Time to disband intellectually bankrupt Shadow RBA

Via The Shadow: With Victoria successfully containing the corona virus and lifting stage 4 restrictions, Australia’s overall Covid-19 statistics (infection numbers and death rates) look comparatively benign. The inflation rate, based on the latest ABS CPI estimate, has returned to positive territory, equalling 0.7% year-on-year in the September quarter (after equalling -0.3% year-on-year in the

129

Bring on QE and lot’s of it!

The AFR has finally discovered a somewhat more balanced debate about imminent RBA quantitative easing but it has more work to do. On the weekend, the usual suspects had a good whinge: “Further rate cuts would be counter productive to the economy,” Professor McKibbin said, “Why keep cutting rates when we know it does nothing

5

Inflation expectations scrape along bottom

From Roy Morgan Research: In September Australians expected inflation of 3.3% annually over the next two years, up 0.1% points on the record low in August. However, Inflation Expectations are still down a significant 0.7% points on the pre-pandemic month of March 2020… Inflation Expectations have fallen significantly for all Australians during the pandemic, down

13

What spooked the RBA?

More monetary drivel from the AFR yesterday: Considerations on the strength of the Australian dollar and the significant drag on the economy because of Victoria’s lockdown were two key factors that influenced decisions on further monetary easing bias, the minutes reveal. In the September minutes the RBA said: Members recognised that the substantial, coordinated and

10

Bill Evans: RBA to cut and print!

Via Bill Evans at Westpac: The Minutes of the October Board meeting of the Reserve Bank of Australia confirm the key themes of Governor Lowe’s speech which was delivered on October 15. They indicate that the Board had effectively decided to ease policy at the October meeting. One reason for delaying the announcement would have