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.
Scotty from Marketing is having us on again, as he can in Australia’s memory-free corporate propaganda soup (that is, the media): Scott Morrison has accused General Motors of allowing the iconic Holden brand to “wither and die” after demanding billions of dollars in taxpayer subsidies to remain in Australia. US-based GM announced on Monday it was
Perhaps it’s time to bet on inflation, via Domain: Interest rates could remain low for “decades”, the Reserve Bank governor has signalled while warning Australians may be starting on a fresh binge of mortgage debt that could expose one of the nation’s biggest economic vulnerabilities. Amid continuing signs the retail sector is struggling, Philip Lowe
Several weeks ago I wrote: The formulation of the gathering catastrophe is simple. Coronavirus is loose in China. The Chinese Communist Party has declared war upon it and must win lest it jeopardise itself. As the virus explodes, the base case for that is now to progessively shut the country down for six-to-nine months. There
Via Westpac: The Reserve Bank has released its quarterly Statement on Monetary Policy (SMP). The report rounds out a full week for RBA communication that has also included the Governor’s decision statement following the Board’s February policy meeting, a speech on “the year ahead” and this morning’s semi-annual testimony to Parliament. The key themes throughout
What’s the need when everything is always all good, via Domain: Reserve Bank governor Philip Lowe says the economic risk of the coronavirus is greater than SARS, as the infection rate surges and countries shut their borders. Dr Lowe said there were hopes the number of cases would fall and the economy would bounce back
Via the AFR: “For now better momentum has at least been demonstrated,” JP Morgan’s Ben Jarman said, “and this is sympathetic to the RBA’s characterisation of a gentle turning point, even if a new risk has arisen that could buffet the data significantly.” Goldman Sachs chief economist Andrew Boak went further, suggesting the RBA would
Is the RBA or APRA responsible for house prices? Yesterday we got the following from Phil Lowe as the stall speed Aussie economy endures both endogenous and exogenous shocks: Our central forecast is for the Australian economy to expand by 2¾ per cent over 2020 and 3 per cent the following year (Graph 5). These growth rates are a little
Via Phil Lowe, Governnor of the RBA just now: The Year Ahead Thank you for inviting me back to address the National Press Club. It is an honour to be here again. At this lunch a year ago, I spoke about the year ahead. I would like to do the same again today. Twelve months
Via the McCrann RBA sockpuppet today: The Reserve Bank left its official interest rate unchanged, as I told you it would a week ago. More importantly, it is expecting to leave it unchanged pretty much into the foreseeable future. That means not just through this year but into 2021 as well. That was made clear by
Some might say stupid. From Bill Evans: As expected, the Reserve Bank Board decided to keep the cash rate unchanged at 0.75%. It is noteworthy that the Board has also not adjusted its growth forecasts for 2020 and 2021 holding them at 2.75% and 3% respectively. The discussion around the two recent shocks to growth
From the Lunatic just now comes no surprise, really: At its meeting today, the Board decided to leave the cash rate unchanged at 0.75 per cent. The outlook for the global economy remains reasonable. There have been signs that the slowdown in global growth that started in 2018 is coming to an end. Global growth is expected
First, the update today: And charting the current daily growth rate of new cases gives us this parabolic curve: By the time of the March meeting there will be roughly 300k total cases. By the time of the April meeting that number will be approaching 1.1m cases. But that doesn’t account for the virus taking
The McCrann RBA sockpuppet has nothing for us today but more bizarre virus sugarcoating: Once it is contained, as it will be, here, there and everywhere, it is back to 2020 business as usual. In December, I suggested that it would be one of relative stability; I still do. The US Fed kicked things off
Via FTAlphaville: The Federal Reserve’s chair Jay Powell has been at pains to point out recent bloating of the bank’s balance sheet does not constitute fresh quantitative easing. Chart, via FRED: Powell’s Fed views the expansion, which comes as the result of its purchases of short-term t-bills, as a consequence of its attempts to lower
Via the UBS team: While it’s too early to know the full potential impact of coronavirus 2019-nCoV, it is clearly another negative for the economy, on top of the catastrophic bushfires. While there’s some comparison to SARS in 2003, the economic link between Australia and China is multiples larger now. In 2003, Australian exports to
Via JPM which says the hit will be 0.2% of GDP in Q1: “Chinese visitors represent around 15 per cent of total short-term arrivals. Assuming Chinese arrivals are down by more than 75 per cent (similar to the SARS episode) for the next two months (the length of the ban on tour groups, for example),
Amid the inane babble of RBA commentary these days, one voice that stands out with a more reasoned approach is Professor Richard Holden, at the AFR today: And while there are reasonable arguments about the effectiveness of, and side-effects from, further cuts, there is really no doubt that the RBA should cut rates on Tuesday.
So says the McCrann RBA sock puppet: The Reserve Bank has finally got what it wished for – inflation is back in the (2-3 per cent) zone. Very critically, this takes inflation off the policy table as a reason for the RBA to cut rates again. A big part of the reason it cut last
The Australian Bureau of Statistics (ABS) today released the Consumer Price Index (CPI) data for the December quarter 0f 2019, which registered plummeting headline and underlying inflation on weakening domestic demand. According to the ABS, headline CPI rose by 0.7% in the December quarter, with annual growth rising to 1.8%: Looking at the major components,
Via the ABS: December Key Statistics The All groups CPI rose 0.7% this quarter, compared to a rise of 0.5% in the September 2019 quarter. rose 1.8% over the twelve months to the December 2019 quarter, compared to a rise of 1.7% over the twelve months to the September 2019 quarter. Overview of CPI movements
Via Banking Day: Several lenders announced cuts to their home loan rates last week, with the number of lenders offering rates below 3 per cent growing. ANZ cut home loan and deposit rates. On the home loan front, for borrowers with loan-to-valuation ratios of 80 per cent or less, ANZ cut the rate on its
A turn about for the McCrann RBA sock puppet, suggesting a lot of nerves at Martin Place: The Reserve Bank will leave its official interest rate unchanged at its first meeting back for the year next Tuesday. In my judgment. It would, though, have been a very different matter if last week’s jobless figures for
Ouch. Via Chris Joye at the AFR: In a stunning development in the debate about whether fund managers should be able to pay advisers large commissions to spruik their listed funds to punters, a leading player in the space, Paul Moore, has joined the chorus of calls demanding Treasurer Josh Frydenberg accept the Australian Securities and Investment Commission’s (ASIC)
Bill Evans joins the deluge: Westpac now expects that the Reserve Bank will delay its next cut in the cash rate to April with the final cut to 0.25% occurring in August. Prior to the release of the surprisingly strong December Employment Report we had expected the cuts to be timed for February and June.
Yesterday, a bunch of banks pushed back their rate cut expectations following the supposedly “strong” jobs report. Let’s get a few things clear about that. The jobs report was not strong. It was weak. The only question is: was it weak enough. Although the headline unemployment rate eased a touch, full time jobs have disappeared
But not weak enough for RBA’s meeting, I suspect. Via ABS: SEASONALLY ADJUSTED ESTIMATES Employment increased by 28,900 to 12,981,600 people. Full-time employment decreased by 300 to 8,834,700 people and part-time employment increased by 29,200 to 4,146,900 people. Unemployment decreased by 12,900 to 693,100 people. Unemployment rate decreased by 0.1 pts to 5.1%. Participation rate
And it ain’t pretty. The Aussie bond market boom is back with more 2020 highs (yield lows): It has steepened a little since last year, but the curve is still inverted out to the five year indicating weak growth at best and high recession risk for years ahead: In turn, this has spreads falling versus
The bond boom is back: Driving equites higher as China updates us on its new plague: 440 cases with 9 deaths so the 2% mortality rate continues; there are lot’s of new measures to contain Wuhan and new reporting mechanisms for Chinese cities but it sure looks like it’s escaped the net to me: It’s
At the AFR: Upgrades to the economic outlook for Australia’s two largest trading partners are another two more red crosses in Philip Lowe’s “cons” column as the Reserve Bank governor weighs up the wisdom of cutting rates to fresh lows. …Treasurer Josh Frydenberg would be also pretty pumped up as well, given expectations of a
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
