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.
Except the right one. BBSW is at new highs with the bank profits pincer tightening and the AFR is desperate for an excuse: “There’s nothing to suggest that it’s sinister just yet, we expect these things to be high as we get to quarter-end as the historical pattern shows,” said Tamar Hamlyn, portfolio manager at fixed
Via Westpac: Governor Lowe opened his comments with the observation that he felt he was the odd one out; a central bank governor that had not experienced negative interest rates, had avoided implementing QE and does not provide forward guidance. But he then noted the striking similarity in the Australian economy with most other economies
Via Morgan Stanley on macroprudential 3.0: An estimated 18 per cent of mortgage customers have a debt-to-income (DTI) ratio that is above six times, an analysis of 1836 mortgagors shows, which is unacceptable when seen through the lens of new lending rules. A correction of the “very high” debt-to-income segment of the mortgage market could
Via the AFR: Despite enjoying longer lives, older Australians will have more younger taxpayers to fund their housing and welfare thanks to skilled immigration compared to most other advanced economies, according to findings presented to Reserve Bank of Australia board members this month. In a challenge to growing anti-immigration sentiment, policy members debated the fact
Right on cue comes the RBA and its Futureboom! Domestic Economic Conditions Members commenced their discussion of the domestic economy by noting that the March quarter national accounts would be released the day after the meeting. Based on indicators for the quarter received to date, GDP growth was expected to have picked up to be
JPM runs a neat global bond curve index that is worth a mention: In particular, the yield spread between the 7-10 year minus the 1-3 year maturity buckets of our global government bond index (JPM GBI Broad bond index) shifted to negative territory this week for the first time since 2007. This can be seen in
For once the RBA’s Luci Ellis making good sense: I’m grateful for the opportunity to speak to you today, and conscious of the infrastructure expertise in the room. There wouldn’t be anything I could add to what you know about project design, selection or funding. What I would like to do today is place infrastructure
From Bill Evans on assignment in Europe: Over the last two weeks I have visited policy makers; central banks; real money managers; hedge funds and corporates in Europe and London. Of course there have been a range of views but in this note I will try to draw out some of the more interesting and
Whoa! Karen Moley at the AFR awakes: Australian banks are being squeezed by higher borrowing costs as the US Federal Reserve accelerates its interest rate hikes and drains liquidity from global financial markets while the Hayne royal commission makes it difficult for them to raise home loan rates. …Analysts estimated that the spreads paid by
From Phil Lowe today: I would like to thank Australian Industry Group (Ai Group) for the invitation to speak at this lunch today. I have participated in many Ai Group events over the years and I have always valued hearing from your members, so it is a pleasure to be here in Melbourne today. The
Via the AFR: The Australian division of the global financial powerhouse Citibank has hit the brakes on residential property lending amid growing fears about a housing slowdown and its impact on the broader economy. But the policy change follows repeated warnings by the bank about looming slowdown in the residential and commercial markets and its
Prepare for the straw that breaks the camel’s back. Via the excellent Damien Boey of Credit Suisse: The limits of pass through We have just published an article on “The limits of pass through” (attached). It explains why we think the economy is in for a combination of tighter lending standards and out of cycle
You can always tell when the RBA is getting worried about bank funding stress because it begins with the propaganda. After noting the stress in its recent statement for the first time as a factor in the cash rate discussions, today Chistopher Kent aims hose the issue off in a new speech: I’d like to
As expected, the RBA has left interest rates on hold. Here’s the statement from RBA governor Phil Lowe: At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent. The global economy has strengthened over the past year. A number of advanced economies are growing at an above-trend rate and unemployment
Via Banking Day: A suspended sentence of three months is the punishment for a former sales director of Securency International convicted on a charge of false accounting. Clifford John Gerathy, 67, of Maroubra, will have the sentence suspended for six months, Justice Kevin Bell of the Supreme Court of Victoria ruled on Friday. “I infer
Via Bill Evans: The Reserve Bank Board next meets on June 5. It is certain to leave the cash rate unchanged at 1.50%. As usual the Governor’s Statement will be of interest. However there were a number of developments in the Bank’s communications that we saw last month in the Statement on Monetary Policy and
Wayne Byers is making good on the great control fraud in Parliament today: When I last addressed this Committee, I outlined some of the many ways APRA is accountable to both the Parliament and the Australian people. These measures are crucial for APRA to maintain the trust of industry and the public as we aim
The RBA amusingly reckons Australia’s neutral interest rate is 3.5%. I’d like to see it try to get there. The excellent Damien Boey at Credit Suisse calculates it at 1.1%: Re-visiting the neutral rate with impaired monetary transmission We have just published an article, re-visiting our understanding of the neutral rate in an environment characterized
It’s obvious that Australia’s mass immigration program is a giant scam perpetrated by the politico-housing complex. But it is an interesting thought experiment to treat is as considered macro policy versus the alternatives. So let’s do it. In 2011 Australia joined the secular stagnation that now rules unchallenged across developed economies worldwide. This malady is
Good one, Mr Ian Harper: Falling house prices won’t prevent the Reserve Bank of Australia from raising interest rates when the case to do so emerges, Ian Harper, Dean of Melbourne Business School and member of the central bank’s policymaking board, said today. “The bank doesn’t target house prices,” Mr Harper said in an interview
Via the Kouk earlier this week: Do we need to be worried about Australia’s economic outlook? The Reserve Bank of Australia reckons that the next move in official interest rates is more likely to be up than down. RBA Governor has said so in recent weeks as he talks up the prospects for the economy
Notice the expanding number of banks turning bearish on house prices lately? Damien Boey today argues that that is springing from a much deeper problem. Interbank funding market is redundant and therefore relevant It is well documented that interbank credit spreads are elevated by historical standards. But it is far less well understood why this
Via The Guardian: Malcolm Turnbull has confirmed he has sought information from Australia’s intelligence agencies about the implications of the chair of parliament’s intelligence committee publicly revealing details of an FBI investigation provided by American officials in a private briefing. It comes as the governor of the reserve bank, Philip Lowe, called for Australia to “avoid
From Phil Lowe last night: Thank you very much for the invitation to address the Australia-China Relations Institute. It is an honour for me to be here with so many China experts. What happens in China is important to Australia, and to the broader global community. This is as true in the world of economics
No idea at NAB: We still believe that conditions are in place for wages growth to rise in the future. Our modelling of factors that affect wages — inflation, labour market under-utilisation, productivity and the terms of trade — suggest that we would already have expected to see stronger wages growth. Clearly this has not
Excellent stuff from Damien Boey at Credit Suisse: RBA officials are too optimistic about consumption RBA Deputy Governor Debelle said recently that he could see house prices falling, but consumption growth holding up, despite housing market weakness. Presumably, he was thinking that strong labour income growth would provide households with the necessary insulation against moderate
Via Bill Evans at Westpac: The minutes of the May monetary policy meeting of the Reserve Bank Board repeated the assertion that first appeared in the April minutes. That is that “members agreed that it was more likely that the next move in the cash rate would be up rather than down”. This observation is
Via Forexlive: HSBC wasn’t part of the latest Bloomberg survey here, but they did previously forecast the RBA to move at the end of this year to raise its cash rate. Now they join CBA and ANZ to have shifted their timing of the RBA’s rate hike call to next year. On the move, HSBC cites “weak wage
Via the AFR: …Bankwest…is overhauling credit policy and treatment of residential apartments. Units equal to, or greater than 40 square metres, will be subject to an 80 per cent loan to value ratio (LVR), or up to 95 per cent for borrowers with lenders’ mortgage insurance. Units between 30 square metres and 40 square metres
Via Bill Evans at Westpac: The minutes of the May monetary policy meeting of the Reserve Bank Board repeated the assertion that first appeared in the April minutes. That is that “members agreed that it was more likely that the next move in the cash rate would be up rather than down”. This observation is
