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.
Via Bill Evans of Westpac: Last week the Reserve Bank surprised by lowering its inflation forecasts for 2018 (both underlying and headline). Headline was lowered from 2.25% to 1.75% and underlying was lowered from 2% to 1.75%. If correct, that means underlying inflation will have printed below the bottom of the 2-3% target range for
It is amusing watching Australia’s worst economic forecaster, the Reserve Bank, struggle desperately to bend reality to its will. Governor Phil Low palavering in Parliament Friday: Taken together, these data are consistent with our view that wages growth and inflation will pick up gradually over the next couple of years as the labour market continues
This is old school AFR from Alan Mitchell: Economists call the problem “regulatory capture” and, as well as being under-resourced, it seems the financial sector’s main regulators, APRA and ASIC, may have fallen prey to it. None of these problems are new. The failures of governments and regulators to protect the public from the behaviour of industry have
Remarkable news: The Australian Prudential Regulation Authority (APRA) has sought industry feedback on potential approaches to adjust the capital framework for authorised deposit-taking institutions (ADIs) to make capital ratios more transparent, comparable and flexible. The prospective approaches are outlined in a discussion paper released today for industry consultation. The approaches would not change the amount
Via Bill Evans at Westpac: The Reserve Bank’s August Statement on Monetary Policy provides few surprises. Of most interest in the Statement is the update in the Bank’s forecasts. In particular, this update includes another six months of forecasts to cover the whole of 2020. The GDP growth rate forecasts through to end 2018 and
Ah yes, RBA wages virtue signalling. Previously: In June, Reserve Bank governor Philip Lowe issued an extraordinary call to workers: rise up and demand pay rises. “The crisis really is in real wage growth,” he said. “Western workers feel like they cannot get a pay rise.” Yet last week we had this from the Hypocrite
Don’t mistake RBA governor Phil Lowe for a house price bear as the AFR is doing: The message for property investors: this is the housing downturn we had to have. Prior to the recent declines, price growth had outpaced incomes for quite some years, accompanied by a steep increase in credit. “I was quite worried
Via Banking Day: The volume gains made by non-ADI lenders in the investment mortgage market could come under severe pressure in the next few months as APRA begins to loosen the prudential constraints on lending to investment borrowers. Banking Day can confirm that HSBC Australia, Macquarie and People’s Choice Credit Union are among the first
From Damien Boey at Credit Suisse: Housing finance approvals data for June came in below expectations. The value of owner-occupier loans fell by 1% over the month, while the value of investment lending fell by 2.7%. We do not yet have the complete lending finance data set, which also accounts for commercial and personal loans.
By Gareth Aird, Senior Economist at CBA: Key Points: Stronger growth in export receipts has taken Australia’s trade balance into the black. But the current account remains in deficit because the net income deficit has widened. We expect Australia’s current account deficit to average 2½% of GDP over the next two years – lower than
From Bill Evans at Westpac: As expected, the Reserve Bank Board decided to leave the cash rate unchanged at 1.50%. This represents the twenty-second consecutive meeting (last change in August 2016) that rates have been on hold. The previous longest run of steady rates was sixteen consecutive meetings in 1995/96. There were a number of
From The Shadow: New Inflation Figure Leaves Shadow Board’s Recommendation Unchanged The latest data (for the June quarter) shows that CPI inflation ticked up from 1.9% to 2.1%, back inside the Reserve Bank of Australia’s official target band of 2-3%. The unemployment rate remained steady at 5.4%. The RBA Shadow Board rules out any likelihood
Via Domainfax: Suburbs in Sydney’s inner west have borne the brunt of the city’s steepest annual drop in property prices since the Global Financial Crisis. …“I think it reflects a combination of those areas being among the most popular. During the boom they were the key beneficiaries,” said Dr Shane Oliver, AMP Capital’s chief economist.
Via Westpac: The June Quarter CPI printed 0.4%qtr compared to Westpac’s forecast for 0.4%. The market median was 0.5%. Given that at 2 decimal places the rise in the CPI was 0.36%qtr it’s clearly a soft update. The annual rate was lifted on base effects to 2.1%yr compared to 1.9% in 2018 Q1 and 2017
Wholesale inflation is nowhere, from the ABS on the June quarter PPI: FINAL DEMAND (EXCL. EXPORTS) rose 0.3% in the June quarter 2018. mainly due to rises in the prices received for Heavy and civil engineering construction (+1.5%), Building construction (+1.2%) and Petroleum refining and petroleum fuel manufacturing (+11.9%). partly offset by falls in the
I’ve said it before and will say it again. Australia’s future is deflation! Via Credit Suisse: Slightly disappointing 2Q CPI data CPI came in slightly below expectations, rising by 0.4% in 2Q. Year-ended headline inflation picked up slightly to 2.1% from 1.9%, partly on the back of favourable base effects. Core (trimmed mean) CPI came
By Leith van Onselen The Australian Bureau of Statistics (ABS) has released the Consumer Price Index (CPI) data for the June quarter 0f 2018, which registered both soft headline and underlying inflation. According to the ABS, headline CPI rose by 0.4% in the June quarter, the same as the March quarter: However, on an annual
It looks like it is NAB’s turn to go first, at The Australian: Speaking this morning on ABC Radio National Mr Thorburn acknowledged big banks were also feeling the pressure. “Deposit costs have gone up and they remain elevated from where they were six months ago,” Mr Thorburn said. “That’s something we have under constant
It’s spreading across the media now. In QLD, homeowners are locked in mortgage “prison”: THOUSANDS of Australians are stuck in a “mortgage prison” with new lending criteria leaving them unable to refinance their loans to get a better rate. Changes in bank rules around living expenses calculations have effectively wiped huge amounts off the maximum
Global bonds had torrid night last night after the Japanese central bank egged on higher yields at the long end of the curve. The result was a steepening yield curve for many markets but not so Australia: Here the bond curve has flattened some more as growth and inflation prospects wane: We are well off
Via Australian Broker: Over the last week ten institutions have changed their interest rates to home loan products, with a total of 53 product level changes recorded. Explaining the changes in interest rates, Steve Mickenbecker, group executive, financial services, at Canstar, said, “We are seeing a classic bit of churn that tends to happen at the
Via banking legend Ian Rogers at Banking Day: For a bank undisciplined at considering risk, one wonders how deeply stakeholders have delved into the report of APRA’s prudential inquiry headed by John Laker, released at the end of April. The bank’s Executive Risk Committee “was not an effective vehicle for addressing group-wide risks and issues,”
The propaganda won’t help, either. From the AFR’s Jonathon Shapiro: Why are Australian dollar funding rates misbehaving to the point where local lenders are paying punitive costs to borrow money? …when US money market rates spiked up, it became even more expensive to borrow short-term money in US dollars, the Aussie banks turned increasingly to
You heard it here first but now others are saying it, via The Australian: The Australian can reveal six of the nine executives running the Australian Prudential Regulation Authority are former senior banking executives, and three joined the executive within weeks of Malcolm Turnbull calling a royal commission into financial services in December last year.
Via Domainfax: Australia’s version of the sub-prime crisis that ushered in the global financial crisis could be looming, with a significant number of the 1.5 million households with interest-only loans likely to struggle with higher repayments, experts warn. Martin North, the principal at consultancy Digital Finance Analytics, said interest-only loans account for about $700 billion
Pants pooing has become a common pastime for specufestors: Over the past week, four separate lenders have announced their exit from the SMSF lending space, with a further two banks saying loans will no longer be offered to SMSFs. Westpac announced that effective 31 July 2018 it would no longer offer property loans to SMSFs for both
Via Westpac: The minutes of the Reserve Bank Board’s July monetary policy meeting provide some significant additional colour around the Bank’s current thinking. The main points of interest are: 1) a slightly more tentative tone around the outlook; 2) the reinstated line that the next cash rate move “would more likely be an increase than
Interest rate comparison website, RateCity, has estimated that Australian mortgage holders are facing sizeable increases in repayments on the back of out-of-cycle rate rises by lenders. From The Australian: …mortgage holders with loans of $500,000 would be hit with a bill for an extra $358 each year if their lender increased rates by 10 basis
From the RBA: Domestic Economic Conditions Members commenced their discussion of the domestic economy by noting that GDP growth had picked up to be 3.1 per cent over the year to the March quarter, which was above estimates of trend growth. The quarterly growth rate of 1 per cent had been a little stronger than the Bank’s forecast of
Via Australian Broker: More banks have increased interest rates as the pressure of increased funding costs continues to mount. Teachers Mutual Bank Limited (TMBL) announced new rates yesterday. TMBL includes three banks: Teachers Mutual Bank, UniBank and Firefighters Mutual Bank. TMBL announced changes to its fixed rates for new customers to the group’s brands. TMBL
