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.
From Westpac this time: • As mentioned in our front page essay, last week’s RBA Board Minutes did nothing to silence the increasing market focus on the potential for the RBA to venture into more unconditional forms of monetary policy, such as quantitative easing. That is despite RBA Governor Lowe stating later in the week
Via Bill Evans at Westpac: We have decided to bring forward the timing of the next RBA rate cut from August to July. We are surprised that we have to do this, given that a pause between cuts might have allowed for a smoother transmission process but cannot deny the explicit signals provided in the
It’s been like a warm blanket settling over markets for the past few weeks as the Lunatic RBA finally began to talk down the AUD. But it’s back to regular programming today as Phil Lowe ripped it off with a icy blast that questioned the usefulness of global easing: Lowe said the accomodative monetary policy would
Via ANZ: The RBA seems to be in a hurry to get the cash rate lower. Following this week’s RBA Minutes and a speech by Governor Lowe, we have brought forward the expected rate cuts to July and August. It is our expectation that the combination of lower interest rates, a much flatter yield curve
We’ve already been through it. Ever since 2011 the RBA has tried to drop the Australian dollar with rate cuts, or has not lifted rates owing to the fear of a rising Australian dollar. This is what triggered the entrance of APRA into macroprudential policy in 2015. Since then a gulf of diffused responsibility has
Yesterday we saw regulatory capture out in the open at the AFR: Westpac has unleashed a fresh wave of property lending by relaxing serviceability conditions on low risk home loans, immediately increasing the borrowing capacity of aspiring home owners by as much as 8 per cent. A spokesman for Westpac confirmed the policy change saying credit officers
Via the AFR: Westpac has unleashed a fresh wave of property lending by relaxing serviceability conditions on low risk home loans, immediately increasing the borrowing capacity of aspiring home owners by as much as 8 per cent. A spokesman for Westpac confirmed the policy change saying credit officers would now have the discretion to approve principal
Via CBA: Lowe signals another cash rate cut is imminent Following Lowe’s speech today we are now expecting the RBA to cut the cash rate in July rather than August. We expect another 25 basis point cut later in year, probably November, taking the cash rate to 0.75%. Once again, the RBA have emphasised that
Only eight years late comes Phil Lowe: I would like to thank CEDA for the invitation to address this lunch. It is a great pleasure to be back in Adelaide and to participate in another CEDA event. Those of you who follow the RBA closely would have noticed frequent references to the labour market in
On and on it goes, at all news highs again: And still there is no curve steepening. Indeed the belly of the curve inverted more deeply than any time in this cycle: We could not outdo US bonds and the spread narrowed: It is the end of inflation.
It is the boom without cease. All time new highs for Aussie bonds overnight: And the slope is still flattening: Spreads to the US were mixed: JPM’s Sally Auld says the long end is headed below 1%, my own call from six months ago: The RBA delivered a 25bp rate cut this week, as expected.
Via the Lunatic just now: International Economic Conditions Members commenced their discussion by noting that the data on the global economy released since the previous meeting had been mixed. GDP growth outcomes for the March quarter in some economies had been slightly stronger than the second half of 2018, while labour markets had remained tight.
The Lunatic RBA cookie cutter spawns another relentless bull in Jonathan Kearns, Head of Financial Stability Department: Thank you to the Property Council for asking me to speak at this Property Leaders’ Summit. I want to address an important issue for the property industry – the rising rate of housing loan arrears (Graph 1). Why is it that
More bond rocket records tumbled Friday night as Aussie yields hit record lows across the curve: There is still little in the way of curve steepening: Spreads to the US widened: With the ten year now just 37bps above my 1% target, taking more profits is no bad idea!
It should read banks and AFR at war with RBA, via Chris Joye: With only two or three rate cuts left in the Reserve Bank of Australia’s kitbag, and a best-case scenario involving banks passing on half these changes to borrowers, debate is intensifying around whether the central bank will embrace quantitative easing (QE) more
Via NAB’s Alan Oster: • We have changed our view on the cash rate, to include an extra cut in late 2019 – while heavily data dependent we have tentatively placed the cut in November. We also think that lower interest rates will be supported by fiscal stimulus later this year. We would not rule
Via Bill Evans at Westpac: Over the last two weeks, I have been visiting institutional investors, real money managers, and hedge funds in Europe and London. There has been extraordinary interest in the Australian story on this visit. Westpac has received considerable credit for its views over the last eighteen months. A year ago, when
There’s no downside to being a permabull when it comes to bonds. Albert Edwards from ScoGen is he: A key part of the Ice Age has been the prediction that US and European 10y government bond yields would fall to levels never previously seen – replicating Japan’s experience. We were told that this would never
Via CBA: And more: Commonwealth Bank’s economics team, which is tipping another 25 basis point cut to the cash rate in August, which would reduce it to 1 per cent, is doubtful that QE will be introduced “in this economic cycle,’’ arguing there is significant stimulus in the pipeline. …CBA estimates that a local QE program
The unstoppable bond rally continues with new all time lows for yields right across the curve this morning: There is still little in the way of curve steepening and belly of the curve is actually inverting more fully: Spreads to the US have begun to widen again as weak local data and Hong Kong combine
Via Luci Ellis last night: It’s great to be back at one of my alma maters to deliver the Freebairn Lecture in Public Policy. John Freebairn’s extensive publication record and long history of contributions to public debate speak to his abiding interest in public policy across a broad range of areas. It is indeed an
No, it doesn’t. So why is it involved in this, via Domain: Reserve Bank governor Philip Lowe has urged key Senate crossbenchers to pass the Coalition’s $158 billion income tax cut package to get more disposable income flowing to stimulate a slowing economy. …In private briefings with the crossbench last week, Dr Lowe acknowledged the
The AFR’s war on rate cuts has shifted gear today, first Jonathon Shapiro: For those who are ultra-careful with their money, the billboards outside bank branches in 2009 advertising 8 per cent deposit rates must have felt like a welcome reward for conservatism. …for now, the savers may lament they are being forced to subsidise
Via Bill Evans at Westpac: As expected, the Reserve Bank Board decided to lower the cash rate by 25bps to 1.25%. This action is very much in line with Westpac’s forecast first set out on February 21, although it comes two months earlier than our original timeline. The basis for the RBA decision was “to
Monetary madness is sweeping the Australian elite. Let’s start with Professor Warwick McKibbin, at the AFR: There is evidence internationally that well designed infrastructure, with a rate of return that is considerably higher than the cost of funding, increases private sector productivity. …There also needs to be a change in the monetary policy framework. Today inflation
Chanticleer is at it again today: At the end of a huge week for the big four banks, it’s time for those reliant on dividend income to think hard about the longer-term implications of official interest rates being lower for longer. There is no need to panic. But as official rates set by the Reserve Bank
Via Terry Mccrann today: The economy is struggling, really struggling. It’s going to get help from the Reserve Bank with its official rate cuts, now definitely, plural. But it also needs help and needs help big-time from Canberra — and I stress the broader word Canberra not just simply and simplistically, the government. The government’s
The nightmare is real, says MS, which lowered its Aussie growth outlook to 1.8% today: The other driver of household spending weakness was the savings rate increasing … In our view this reflects the pressures on household de-leveraging, in an environment of low wage growth, elevated debt and falling house prices. This may also limit the
Via The Australian comes ANZ mulling the end of rate cuts: “Further support for the economy is likely to be required in 2020, given the gathering global uncertainties,” Mr Plank said. “We think the RBA will likely reach for tools other than the cash rate, with explicit forward guidance the possible first choice,” he said. Mr
Via the Kouk: The Reserve Bank finally did it. Cut interest rates that is. In an effort to redeem itself from what is clearly its worst policy mistake since the lead into the early 1990s recession, the RBA has belatedly delivered the 13th interest rate cut in this very long monetary policy easing cycle. It
