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.

8

T’was the Lunatic RBA that killed Holden

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

17

Lunatic RBA: Rates low forever now

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

17

After RBA, Recessionberg puts stimulus cue in the rack

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

4

Westpac: RBA SoMP “surprisingly confident”

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

10

Wrongfully wrong economists call end to RBA easing

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

14

Why the RBA should cut today

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

14

UBS: Australian virus impact “many multiples” of SARS

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

7

Of course the RBA should cut

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.

9

CPI in Detail: Inflation up in smoke

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,

6

Fundie jams red hot poker into Frydenberg’s LIC loophole

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)

9

Jobs weak but…

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

17

Bonds, not stocks or houses, are pointing to Australia’s future

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

3

Poor China analysis that the RBA should ignore

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

12

The RBA should cut straight to zero

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