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.

1

Quant quake 2.0?

Via the excellent Damien Boey at Credit Suisse: The “quant quake” is happening again. Overnight, and indeed, over the past week, we have seen a very sharp rotation into value factors and out of momentum factors. This follows on from the sharp rotation we saw from late August to early September. To be sure, there

0

More CPI previews

UBS was dovish. Damien Boey at Credit Suisse is hawkish: Ahead of next week’s much anticipated CPI release, we thought it would be interesting to see what the RBA’s core inflation models are saying right now. As background, the RBA models core inflation using the following variables: The size of the output gap. Unit labour

16

Westpac: Aussie QE odds-on in 2020

Via Bill Evans: The employment report for September printed a modest fall in the unemployment rate from 5.26% to 5.20%. Further, the underemployment rate fell from 8.53% to 8.35%. That will be sufficient to avert another rate cut from the RBA in November. Westpac has consistently argued that a cut in November was unlikely and

64

Bugger the surplus. Households hate life without RBA insurance

MB often works with international hedge funds on the Aussie economy. I recall the reaction of one from the US when he discovered that, unlike US fixed rate mortgages, Australian mortgages are all floating rate. He declared immediately: “Households must all pray for the next recession!” Why? Because that meant cheaper repayments for the overwhelming

3

Foghorn: No RBA cut coming in November

Via RBA foghorn, Terry Mccrann: It will leave its official interest rate unchanged at its regular and decidedly idiosyncratic Cup Day meeting. Leaving the rate unchanged was already the most likely outcome of the meeting before Thursday’s monthly jobs data; the continuing good news on jobs made it a slam dunk. …The next rate cut,

26

RBA outlines “sizeable” construction crash

Yeh, they’re onto it at last. Deputy Governor Guy Debelle today: The housing market has a pervasive impact on the Australian economy. It is the popular topic of any number of conversations around barbeques and dinner tables. It generates reams of newspaper stories and reality TV shows. You could be forgiven for thinking that the

20

CS: RBA has lost it

Via the excellent Damien Boey at Credit Suisse: Minutes from the RBA’s early October meeting were dovish. The Bank highlighted: Its easing bias. That rising house prices are not a constraint on policy easing right now. The low(er) exchange rate as an especially important channel for rate cuts to be transmitted to the broader economy.

0

Bonds BTFD?

Post trade non-deal, Aussie bonds have sold off with the move in the US especially violent, though Australia has followed: The Aussie curve has steepened: And, giving us read of just how locally based Aussie weakness is, spreads to the US have widened: So, is it BTFB? Westpac thinks so: Its an important week for

40

Bearish RBA finally gets it

The happy pills have soured at Martin Place: International Economic Conditions Members commenced their discussion of global economic conditions by noting that heightened policy uncertainty was affecting international trade and business investment. This had continued to be apparent in a range of indicators, including new export orders and investment intentions. Conditions in the manufacturing sector

17

Gittins: Ain’t no QE comin’

Via Ross Gittins today: It’s amazing so many people are so sure they can see where the Reserve Bank is headed. Once interest rates are down to zero it will be on to QE – “quantitative easing” – and negative interest rates, they assure us. Don’t you believe it. …People assume the Reserve is hot

9

Recessionberg launches bank inquiry into self

It’s never enough bubble for Joshy Recessionberg: The big four banks will be ­officially investigated for their repeated failures to pass on the full extent of central bank rate cuts to consumers under a government-launched probe into home-loan gouging. Josh Frydenberg has directed the Australian Competition & Consumer Commission to investigate the pricing of residential

14

Banker kings move to control RBA and Treasury

Via the AFR: Shayne Elliott, the chief executive of one of the country’s biggest banks, has called on federal Treasurer Josh Frydenberg to convene a summit to discuss the broader economic implications of zero per cent interest rates and quantitative easing. Mr Elliott, who is the CEO of ANZ Banking Group and chairman of the

6

Discarded economists rail against QE

First up, monetary curmudgeon and former RBA boffin, Stephen Grenville: So why would it be a bad idea for the Reserve Bank to undertake QE? To start with, it is unlikely to have much beneficial effect. America’s QE1, at the height of the 2008 financial crisis, was very effective because the Fed bought mortgage securities

22

Phil Lowe endorses QE to the moon!

From a new report by The BIS’s Committee on the Global Financial System which Phil Lowe chairs: Executive summary Central banks expanded their balance sheets on an unprecedented scale in response to the global financial crisis (GFC) and its aftermath. To address financial market dislocations and the limitations of interest rate policy as rates approached

11

Aussie bond boom returns

It’s bid-o-rama for the bond rocket again today with yields at record lows across the curve: There has been virtually no curve steepening to speak of with inversion now out past the seven year: The spread to US has bottomed, I reckon, though I can’t see any great compression ahead: More boom to come unless

2

How much further can bonds rally?

Via Moody’s: Next Recession May Lower 10-year Treasury Yield to Range of 0.5% to 1% Despite today’s ultra-low yields, Treasury bonds may still pay off handsomely once recession strikes. Accordingly, Treasury bond yields are likely to set new multi-decade and possibly new record lows within the next five years. Any claim that the U.S. Treasury

5

APRA appoints bankers galore to key positions

Apology withdrawn, Wayno, via Banking Day: Under the new structure, each of APRA’s six operating divisions will be led by an executive director, as announced yesterday by APRA chair Wayne Byres. Therese McCarthy Hockey, a 20-year career treasury professional, mostly at Deutsche Bank’s Australian and UK operations, has been appointed as executive director, banking. She

7

More bond records tumble

Aussie bonds are bid once more with a range of record low yields today, mostly at the short end and in the belly of the curve: The short end has begun pricing another rate cut and the curve is still inverted out the six year. The long end has also rallied but there has been