This is a bit like asking Dracula why there’s a blood shortage but here’s Goldman with its best effort on why bond yields are plunging: Q: The reflation theme in markets seems to be unwinding, led by bonds. What is recent price action signaling about the recovery? A: Since the recent Mid-may highs, both 10y
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.
By Gareth Aird, head of Australian economics at CBA Key Points: The July Board Minutes note that the decision to taper bond purchases from mid‑September was underpinned by the assessment that, “economic outcomes had been materially better than earlier expected and the outlook had improved.” The near term economic outlook has since deteriorated due to
UBS with the note: Q2 CPI forecast revised up: to lift 0.9% q/q & 4.0% y/y, highest since the GFC We sharply revise up our Q2 CPI forecast. Headline is now expected to lift by 0.9% q/q, above our long-held preliminary forecast of 0.6%, and further above the available consensus of ~0.3% (albeit ‘stale’ &
TSLombard with the note: With vaccines curbing the potency of COVID-19, policymakers can begin to unwind their fiscal and monetary support programmes–starting with QE. Central banks’ asset purchases have had only modest effects on GDP and inflation, but they are important for financial markets. While the authorities will avoid a new”taper tantrum”, investors should expect
JPM with the note: Just under a year ago, theFedcompleted its framework re-view and officially changed its monetary policy strategy to a flexible average inflation targeting (FAIT) approach. With the acceleration in inflation since then, PCE inflation now averages 2.0% over the past three years. Incoming months aver-age inflation over this three-year lookback period is
Westpac with the note. For some reason market always conflate RBNZ and RBA so the AUD has followed NZD higher: Today’s RBNZ Monetary Policy Review was more hawkish than May’s MPS, and had a more hawkish tone than markets had expected and priced. There were no changes to policy settings, as was widely expected. But
Roy Morgan’s inflation expectations survey for June has been released which reports that Australians expected inflation of 4% over the next two years, up 0.3% and the highest Inflation Expectations since the pandemic began. Inflation Expectations are also now 0.8% higher than they were a year ago – the biggest year-over-year increase since the series
By Gareth Aird, head of Australian economics at CBA Key Points The RBA will take a more flexible approach to bond buying (QE) from early September when bond purchases will be at the reduced rate of $A4bn a week until at least mid‑November (as compared with the current pace of $A5bn per week). The RBA
Will wonders never cease. Via Goldman: BOTTOM LINE: The Governing Council adopted a 2% inflation target in its strategy review and agreed that owner-occupied housing costs should be reflected in the HICP. Although the target is symmetric, the ECB signals tolerance to temporarily overshoot 2% inflation given the lower bound on interest rates, but does
I get by with a little help from my friends. Albert Edwards of SocGen with the note: The unravelling of the inflation/reflation trade has accelerated over the past week.US 10y bond yields continue to decline and have now broken a crucial technical level. This could see the rally accelerate sharply, and with it, the continued
In the Q&A to yesterday’s speech to the Economic Society of Australia, RBA governor Phil Lowe hosed down speculation that interest rates would be lifted to cool the property market: “I sometimes read commentary that we’ll raise interest rates to choke-off housing prices. And with housing prices rising quickly, the Reserve Bank will raise interest
Goldman with the note: 1. The minutes to the June FOMC meeting reported that “various participants” pulled forward their expectations for the appropriate timing of tapering “in light of incoming data”— presumably a reference to higher inflation given the labor market disappointments of the second quarter. “Participants” also viewed being “well positioned” to taper as
JPM with the note: Treasury yields declined 2-6bp following a somewhat weak ISM services index release. The reaction of the Treasury market to data over the last week and the lack of reaction in the TIPS market indicates this move has been exaggerated by short covering…. …this has left 10-year Treasury yields about 25bp, or
The media is full of the usual waffle today about tightening monetary policy, rises rates head. Blah, blah, blah. Nothing could be further from the truth. The RBA committed a policy error yesterday that has been called out immediately by the bond market which is the only bourse that understands the sheer magnitude of the
Chris Joye at Coolabah with the note: After months of anticipation, the RBA finally delivered on its third quantitative easing (QE) program. Way back on 5 February 2021, when Coolabah first forecast a $100 billion QE3 program, the notion of a third stanza of QE extending into 2022 was not fashionable amongst economists at the time.
The RBA just now: At its meeting today, the Board decided to: retain the April 2024 bond as the bond for the yield target and retain the target of 10 basis points continue purchasing government bonds after the completion of the current bond purchase program in early September. These purchases will be at the rate of
For the past few months, MB has been formulating a risk case for equities that has been steadily growing in our matrix of probabilities. It is that a looming triple slowdown in stimulus, Chinese and US recoveries will be enough to leave very expensive assets stranded and exposed to an adjustment. This risk case is
There are five reasons why the RBA should not tighten monetary policy at all tomorrow. First, commodity prices are going to crash over the next year. This is already baked in. Current trends in China indicate a renewed structural reform push that includes $1.5tr less new credit this year than last, much of it in
APRA monthly banking statistics are out and show that investor mortgages are still some distance from triggering macroprudential tightening. May numbers showed monthly growth slowing as Westpac pulled back though this looks more likely to be a portfolio adjustment to me: Even so, at just 1% year-on-year growth, investors mortgages from the big eight is
Moody’s with the note: As economic recoveries proceed at different speeds and stages around the globe, there is rising interest about when normalisation of monetary policy will begin. Many central banks have had interest rates sitting at the lower bound since providing unprecedented monetary support at the height of the global pandemic. Normalisation of the
An excellent note from UBS. My own view remains that the next move in rates is down as commodities crash, macroprudential stalls housing and border reopening kills wages. How many rate hikes will the RBA deliver? This time also depends on liquidity The RBA note Australia’s recovery out of the pandemic is stronger than anyone
In the Q&A to yesterday’s Keynote Address at the Australian Farm Institute Conference, RBA Governor Phil Lowe stated that the Council of Financial Regulators (i.e. RBA, Treasury, APRA and ASIC) are actively looking at macroprudential tools to curb the mortgage/property market (listen from around the 34 minute mark): “The Council of Financial Regulators meeting last
BofA with the note to break inflationists hearts. What is so amusing about this is that as transitory inflation reverses, it is going to deliver a very large disinflationary shock next year at which point we’ll have to argue that that is transitory as well! Strong price pressures have materialized in the economy over the
Deutsche with the note that should make AUD bulls shiver: For global markets, the US April CPI was by far the most eye-catching inflation release, but there are enough indications from individual country data and now the latest PMI reports, that bottleneck price pressures are a global phenomenon. Which begs a few questions: what are
Goldman with the note: The FOMC left the funds rate target range unchanged at 0–0.25% at the June meeting, and raised the IOER and RRP rates by 5bp. The median projected path for the policy rate in the Summary of Economic Projections (SEP) increased to show two hikes by 2023, despite almost no change in
Below find the latest installment from an uber-dovish Phi Lowe. The AUD rose a few pips though god only knows why. This is as dovish as he could possibly get: no inflation, no wage growth, recovery incomplete, no macroprudential (which will come first). Nothing hawkish. And he sure isn’t going to tighten when so much
Nataxis with the latest on Bitcoin: Bitcoin: adjustment nearly over? Since mid-May, Bitcoin and crypto assets have been in crisis. After a high at $63,500, Bitcoin collapsed to almost $30,000, Ethereum went from a high of $4,400 to a low of $2,000. The capitalisation of crypto assets has fallen from a high of $2 tr