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.
Mr Leon Berkelmans, Senior Manager in the Domestic Markets Department at the RBA, began the great softening up process yesterday: The Reserve Bank is not planning on engaging in quantitative easing anytime soon, so please do not form the impression that at the next board meeting they will be discussing it. They will not. But, just
The two year Aussie bond yield has broken out to three year highs today. The five year is trailing a little and the ten isn’t interested: Not only are we not building in a term premium, the curve is flattening as growth and inflation prospects fade over the medium term: We are still tracking the
Breaking from ME Bank ME’s standard variable rate for existing owner-occupier principal-and-interest borrowers with an LVR of 80% or less, will increase by 6 basis points to 5.09% p.a. (comparison rate 5.11% p.a.^). Variable rates for existing investor principal-and-interest borrowers will increase by 11 basis points, while rates for existing interest-only borrowers will increase by
Via Bill Evans: The minutes of the monetary policy meeting of the Reserve Bank Board for April contained few surprises. Arguably of most interest was the inclusion of “in current circumstances, members agreed that is was more likely that the next move in the cash rate would be up rather than down”. Our analysis indicates
DXY was down last night: AUD was stablish: Gold firmed: Oil fell: And remains vulnerable with a huge speculative long: Base metals lifted: Big miners fell: EM stocks struggled: The EM junk tide is definitely going out. A slowing China signal? Short end Treasury yields marched higher, the curve flattened again: Not so bunds: Stocks
Via the AFR: The nation’s third-largest residential property lender is warning brokers that their future mortgage recommendations will need to satisfy strict new internal guidelines and ‘external’ scrutiny, a reference to regulatory or possibly legal action. “We recognise the need for trust in brokers and look forward to public policy discussions about measures that will
Ahead of the May budget Gunnamatta spoke with Leith van Onselen and David Llewellyn-Smith about the economic outlook and the unfolding Australian economic narrative. In a wide ranging discussion Leith and David cover Australia’s reliance on commodity exports and the implication a subsiding global commodity market has for this dependence, as well as the potential
Via a panicky Domainfax and following this week’s WBC tightening: Tom Crowley, National Australia Bank’s acting general manager of home lending, said the bank was collecting “granular” details of a customer’s expenses, and it was keen to work with regulators and other lenders to improve their assessments of borrowers’ finances. …Managing director of mortgage broker Homeloanexperts.com.au,
From the RBA’s new Financial Stability Review comes a look at interest-only loans: Interest-only (IO) loans account for a sizeable and growing share of total housing credit in Australia, now representing around 23 per cent of owner-occupier lending and 64 per cent of investor lending (Graph B1). IO lending has the potential to increase households’
Phil Lowe late yesterday: I would like to thank the Australia-Israel Chamber of Commerce for the invitation to speak at this lunch today. It is great to be back in Perth again. I look forward to learning more about how the Western Australian economy is going. Later this year, the full Reserve Bank Board will
This is big, via the AFR: Home loan applicants at Westpac will have to reveal spending on everything from pet care to tax and toiletries, under a tough new “responsible lending” regime being introduced from next Tuesday. …”We are making changes to understand the granularity of our customers’ expenses and liabilities,” the bank is telling
By Leith van Onselen The ABC’s business editor, Ian Verrender, has written a ripper article today explaining why Australian mortgage rates might soon start to rise: Official rates may not be going anywhere any time soon… But tremors are roiling through global money markets that will flow directly through to higher domestic rates. Given the
Via Bloomie: The spread between Australian and U.S. bond yields has reached its most extreme and will narrow again as Aussie wages and inflation spur an earlier start to monetary tightening Down Under than most anticipate, according to Bank of America Merrill Lynch. …Morriss’s expectation for Australia’s official cash rate to be increased in the
Evil Anna was in full flight yesterday: The Australian Banking Association chief executive Anna Bligh has urged the federal government to ensure that any regulatory changes made in the aftermath of the Hayne royal commission remain balanced or risk unintended consequences. “Tightening access to small amounts of credit can push more vulnerable customers out of
The AFR did a whack panel on the banks yesterday: If the morning session of The Australian Financial Review Banking and Wealth Summit was dominated by the issue of how to ensure senior bank executives get their pay docked when they’ve overseen major stuff-ups, the afternoon’s sessions looked at whether housing is the banks’ new
Via the excellent Damien Boey at Credit Suisse: March was all about the spread and trade scare March was all about interpreting widening interbank credit spreads, and making guess work of trade protectionism. The mainstream view seems to be that trade protectionism is the fat tail risk driving markets at present, and that interbank credit
Via the RBA just now: At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent. The global economy has strengthened over the past year. A number of advanced economies are growing at an above-trend rate and unemployment rates are low. The Chinese economy continues to grow solidly, with the authorities
Via Bill Evans at Westpac: The Reserve Bank Board next meets on April 3. There is almost certain to be no rate move coming from that meeting. Market Pricing and Analysts Forecasts Market pricing for the RBA has moved significantly over the last six months. Last September markets were predicting nearly two rate hikes by
More pain for Bloxo today: It will surprise no regular observer that HSBC has moved their RBA call for a rate hike from Q3 to Q4 ‘18 – this trend continues won’t be long before consensus forms for a 2019 move rather than late 2018 #RBA #AUD — Alex Joiner (@IFM_Economist) March 28, 2018
Via Damien Boey at Credit Suisse: Markets chasing the wrong headlines Over the past few days, investors have been closely monitoring trade tensions between the US and China. The most recent innovation came overnight, with the US planning emergency curbs on Chinese investments. But we think that the market is dismissing emerging USD liquidity issues
Via the Kouk: Australia urgently needs an interest rate cut The Australian economy urgently needs an interest rate cut, or two, if there is to be a pick up in activity, lower unemployment, higher wages growth and for inflation to move back to the RBA target range. The RBA last cut interest rates in August
Via the AFR: From April 17, Westpac and its subsidiaries, BankSA, St George Bank and Bank of Melbourne, are increasing the number of expense categories from six to 13 to enable “more detailed conversations to better understand their financial situation”. Customers will also have to produce more documentation with their local applications to support their
Via the excellent Damien Boey at CS: Beta and alpha Overnight, the US equity market rallied strongly, more than recovering Friday’s losses, and noticeably outperforming bonds. There was little new news to speak of, but we think the following developments were noteworthy: 1. There are reports that the US and China are quietly de-escalating trade tensions.
More on looming out-of-cycle rate hikes today from Deutsche: Over the past 3 weeks the bills-OIS spread has widened materially, rising by around 20 basis points to reach 48 basis points. On our estimates a 25 basis point increase in the bills-OIS spread could reduce net interest margins by 2 to 5 basis points on
Via the excellent Damien Boey at Credit suisse: Explaining a shift in USD funding behaviour In the wake of test match cheating scandal, the Australian market is also likely to do something “un-Australian” today. Therefore, it is worth having an “un-Australian” explanation for what is going down. Our global money markets expert Zoltan Pozsar has
Via the excellent Damien Boey at Credit Suisse: Fed hikes again, with confusing guidance As widely anticipated, the Fed raised rates to 1.5-1.75% from 1.25-1.5%. That said, the tone of the accompanying meeting statement, and the Fed’s forecasts (dot plots) were a little confusing, but on balance appeared slightly dovish. On a median basis, officials:
Via Westpac’s Bill Evans: As expected, the Minutes of the March Monetary Policy Meeting of the Reserve Bank Board provided no real surprises although from our perspective there is some confusion as to the Bank’s growth forecast for 2018. When the Governor made his statement following the Meeting, he changed the growth assessment for 2018
Via The Australian: Suncorp on Tuesday said it would be hitting owner occupier borrowers with a five basis point increase, which would leave them with a standard variable rate of 5.6 per cent. Investors will face an 8 basis point hike to standard variable loans, taking the rate to 6.07 per cent. Borrowers with interest-only
Via the RBA: International Economic Conditions Members commenced their discussion of the global economy by noting that GDP growth in most of Australia’s major trading partners had risen to be above its five-year average over 2017 and that this momentum appeared to have been maintained into 2018. Global GDP growth had picked up to be
From deputy governor Guy Debelle today: Today I am going to talk about some issues around risk and return in a low rate environment, in line with the theme of the conference. I am going to highlight questions that strike me as worth asking about the way return and risk are reflected in the current
