Great work from Bill Evans at Westpac to round out a pretty bizarre week: We have recently read with interest a number of pieces from FOMC officials including Chairman Powell and Governor Brainard around the concept of neutral rates. Neutral rates are “the ideal” for central banks. At that neutral level inflation is stable around
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.
Better work from Chris Joye this week on bonds as he abandons the worst of his arguments about the benefits of floating rates. However, his main purpose seems to be to distract from his prior poor arguments and so he builds an irrelevant straw man and then demolishes said straw man. In his original piece,
And good on it, at Domainfax: Australian Securities and Investments Commission boss James Shipton has called for a radical increase in the regulator’s funding and slammed delays to legislation that will dramatically increase penalties against business crooks. Appearing at a parliamentary hearing in Canberra, Mr Shipton made his strongest speech since being appointed to the
Here’s what Deputy Governor Guy Debelle said about weak wages this week: As we have stated many times, we expect that will lead to a gradual increase in wages growth and, in turn, inflation. There are a number of uncertainties around the extent and timing of the decline in the unemployment rate and the pick-up in wages
Via Damien Boey at Credit Suisse today: Mixed September labour market report The September labour market report was mixed. Headline employment came in below expectations, rising by only 5.6K in September. However, the composition of jobs growth was actually quite favourable, with full-time employment rising strongly by 20.3K over the month. Part-time employment fell by
And people wonder why I call the RBA corrupt, via Domainfax: …the Reserve Bank’s deputy governor Guy Debelle said workers reluctance to take a risk and go after a better paying job was also playing a role. “One of the factors contributing to this is the low level of voluntary job turnover. Workers tend to
Last week Harry Triguboff brushed aside concerns about a potential slump in house prices because of Australia’s mass immigration program, while also demanding policies to stimulate the market: ‘The way Australians have always made money is on property. But prices have come down and mortgage arrears are growing,’ he said. “Prices won’t crash,” he said, but noted
From Deputy Governor of the RBA Guy Debelle: Over the past year, there have been welcome developments in the Australian labour market. Employment has grown strongly, the participation rate is close to its highest level on record and the unemployment rate has declined to be at a six-year low. This is consistent with the above-trend
Yawn: International Economic Conditions Members commenced their discussion of the global economy by noting that GDP growth in many of Australia’s trading partners had continued at an above-trend pace in the first half of 2018. Although timely measures of global activity had recently eased somewhat, global growth was expected to remain solid over the following
Via Westpac: Though credit spreads in the US are off their lows, they have remained relatively impervious to the heightening global risks surrounding trade and geopolitics. This partly reflects the strength in the US economy which has continued to support corporate earnings. With credit spreads in the US and Australia tightly linked, our spreads have
Via Chris Joye today: Supposedly smart investors argue there is a long-term negative correlation between fixed-rate bonds and equities that means you should allocate to the former to protect against losses in the latter. As the experiences in February, September and October demonstrate, this presumption is totally wrong. Equities have been smoked while the Composite
Paul Bloxham, Chief Australia and new Zealand Economist at HSBC via Business Insider: “The floating AUD has long been Australia’s most powerful economic shock absorber, and it deserves a lot of the credit for the long boom,” Bloxham says. “It’s been a long time coming, but the widening interest rate differential with the US appears
Via Banking Day: The new and popular Bank Financial Strength Dashboard of the Reserve Bank of New Zealand may be extended to include “conduct” metrics, Toby Fiennes, head of prudential supervision, told an accounting forum last week. “In the wake of the recent Australian Financial Services Royal Commission’s interim report, there is much focus on
Via the RBA ‘s Alexandra Heath, Head of Economic Analysis Department Much has been said about the structural changes underway in the labour market that are redefining the nature of work. Previously, I have talked about changes in demand for different types of skills in the workforce, noting that an increasing share of today’s jobs are non-routine
They’re back. This time a new crop of AFR journos: Rising US interest rates fuelled by Donald Trump’s tax cuts stimulating the American economy could soon push the Australian dollar below US70¢ and gradually lift local inflation to help the Reserve Bank of Australia increase borrowing costs next year. The Australian dollar dropped to a
From the Herald Sun comes a nice list of financial crimes. Charging dead people: In April the commission revealed the sordid details in which planners from Commonwealth Bank subsidiary Count Financial profited for years from dead customers’ fees. In the worst case revealed, a planner knew a client had died in January 2004, but was
The AFR is today describing what will very likely become the next round of mortgage tightening, risk-aversion in banks: A major bank has a blacklist of 6700 apartment projects across Australia where buyers are refused loans or are offered reduced loan to value ratios (LVR), according to mortgage broker Home Loan Experts. …The reasons for
We are looking at the permanent destruction of what is left of the Reserve Bank of Australia’s brand credibility. Why? This from the AFR: Treasurer Josh Frydenberg has confirmed he is closely liaising with the Reserve Bank of Australia and Treasury about ensuring the economy avoids a credit squeeze, amid market concerns the royal commission’s
At the AFR comes the good news that your central bank is hard at work preventing meaningful reform to fraudulent bank lending: Treasurer Josh Frydenberg has confirmed he is closely liaising with the Reserve Bank of Australia and Treasury about ensuring the economy avoids a credit squeeze, amid market concerns the royal commission’s damning findings
Yesterday’s RBA activity has begun the oil tanker’s swing towards rate cuts. The day began with the leak that the RBA is so concerned about royal commission fallout that it is prepared to be an accessory after the fact to criminal activity, via the AFR: The Reserve Bank of Australia and Treasury have privately cautioned the Morrison government
The corrupt Reserve Bank of Australia has today left the cash rate unchanged. Here’s the statement: At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent. The global economic expansion is continuing. A number of advanced economies are growing at an above-trend rate and unemployment rates are low. Growth in
From The Shadow: This month’s figures revealed that the Australian economy grew 0.9 percent in the June quarter, above the 0.7 percent market consensus forecast. Growth was supported by strong domestic as well as overseas demand; fixed investment, however, remained flat. CPI inflation remains at 2.1%, inside the Reserve Bank of Australia’s official target band
APRA and ASIC may be the one’s left carrying the bag for Australian bank’s housing bubble excesses but they had good company in the RBA and Treasury. Following the GFC the RBA openly declared that Australian household debt was a clear and present danger to the economy yet when its mooted thirty year mining boom
From Paul Dales today: “It seems as though the RBA won’t seriously consider raising interest rates until the second half of next year at the earliest,” argues Paul Dales, chief Australia economist at Capital Economics. The Fed might well have hiked two or three more times by then, taking US rates near to three per
From Gotti: While there was no surprise in the US Federal Reserve’s interest rate rise, the quick response from the US share market was an ominous sign for Australia and our struggling housing market. …Our big banks borrow around 35 to 40 per cent of their funds overseas so their costs will also rise although,
Via Westpac: APRA’s approach to housing pays off The macroprudential approach to easing credit growth while not spurring a shock to the housing market has “pleasantly surprised” regulators. This is the assessment of JP Morgan chief economist Sally Auld. Speaking on a panel at the Breakfast with the Economists in Sydney on Friday. Auld joined
DXY was soft last night: AUD launched: But couldn’t keep pace with EMs: Gold was up a bit: Oil more: Base metals mixed: Big miners moonshot: EM stocks rallied: EM junk led the way: Treasuries were flogged: Bunds too: Aussie bonds were smashed and short-end yields broke out: Stocks were firm: Westpac has the wrap:
Via S&P: Australian prime home loan arrears rose year on year in July but remained unchanged month on month, according to a recently published report from S&P Global Ratings. The Standard & Poor’s Performance Index (SPIN) for Australian prime mortgages, which has been steady at 1.38% since May, was up from 1.17% a year earlier.