The rarely useful Elizabeth Knight put her finger on something over the weekend: There is a hidden and worrying risk lurking for a particular set of mortgage borrowers, whose level of financial stress is about to get a whole lot worse. It’s those home owners with interest-only loans that are now increasingly under the pump
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 NAB: NAB has today announced changes to its variable home loan interest rates, effective Friday 30 June 2017. The following three changes have been announced: The interest rate for owner occupiers making principal and interest repayments will decrease by 0.08% per annum, to 5.24% per annum The interest rate for owner occupiers making interest
A fading China, downgrades, levies, housing bubbles and no growth. Why would you own an Aussie bank? UBS see more to come: South Australia hits the banks with a further State Bank Levy In today’s South Australian budget, Treasurer Tom Koutsantonis announced it will be introducing a state based Bank Levy on the Major banks
The conniption begins, from Chanticleer: Bad policy clearly breeds bad policy, as shown by South Australia’s $370 million tax on the big four banks and Macquarie Group. But South Australian Treasurer Tom Koutsantonis has created a problem for himself by aligning his “super profits” tax on the banks with the state’s share of the national
From Bloxo yesterday: …reading the economy recently has also required an expert eye. This is because many of the indicators we typically look at have been affected by the weather, or measurement issues, or both. Cyclone Debbie, which struck Queensland in late March, and unusually wet weather on the eastern seaboard, including the wettest March
This is turning into a smash: Effective on 30 June 2017, Westpac will reduce its variable rate interest rates for customers paying principal and interest on their owner occupier home loans by 8 basis points to 5.24% per annum (comparison rate 5.38% per annum*). Westpac will also adjust interest only rates for variable home loans
It should, via Bloomie: …announcement in coming days from the Australian Prudential Regulatory Authority, which is due to say whether it will require the banks to hold more capital against their mortgage books as part of a wider update on capital requirements. Despite recent steps to rein in their exposure to the riskier areas of
From AMP: The pricing and policy changes for investment property loans, include: Variable interest rates for new and existing investment property loans will increase by 35 basis points For all new investor property loans, the maximum loan-to-value ratio (LVR) is reducing to 50%. This change applies to all new loans with an investment property as
I honestly don’t know what happens to these RBA guys when they walk through the door at Martin Place: The nation’s labour market is close to the point when workers who are keen for jobs or more work are absorbed into a strengthening economy, stoking the wage inflation that is a key precondition for future interest rate hikes,
From Phil Lowe today 2017 Crawford Australian Leadership Forum: Global Realities, Domestic Choices: Responding to a Digitalising, Deglobalising, Post-truth world: The central issue is: where does the future growth in the global and Australian economy come from? There are four points that I would like to make. For a while, growth can come from a cyclical upswing
At the AFR: The most dramatic three-month surge in job creation in 12 years is stoking speculation the long post-boom era of sluggish wages growth, which has helped support hiring at a time of falling national income, will eventually near its end. Former Reserve Bank board member Warwick McKibbin said the figures confirm that official
For a great reflation and “boncano” it sure looks more like a great deflation! The US bond curve is getting smashed flat as Fed hikes outpace inflation expectations: Of course we already know that the Chinese curve has fully inverted for the first time: And the Aussie curve is under a lot of pressure now
Via Macquarie today: Rations are getting smaller In our view, housing lending credit standards are continuing to tighten as banks are responding to the macro prudential requirements and buffers imposed by the regulator. We believe these changes are likely to result in ongoing pressure on the outlook for banks’ volume growth. Furthermore, we see risks
From Bloxo: An influential survey – watched closely by the Reserve Bank of Australia – which showed businesses have just enjoyed the best month since the 2008 global financial crisis may be giving a more accurate reading of how the economy is doing than last week’s weather-blighted GDP report. While many economists have been downbeat
Via The Australian: Weak first-quarter GDP number have pushed ANZ to lower its Australian growth outlook for 2017 and 2018, with the bank now seeing a “one-in-four-chance” of another RBA rate cut and the potential for Quantitative Easing (QE). “We think the first cab off the rank will be another rate cut, but given how
From Morgan Stanley: ANZ lowers P+I rates by5bp, but lifts IOLrates by30bp: On Friday, ANZ announced a 5bp reduction in variable rates for principal and interest (P+I) loans and a 30bp increase for interest only loans (IOLs) “in response toregulatory and market conditions”. This means ANZ’s rate for OOL P+I loans will be the lowest
Via Banking Day: These are “sobering times” in the banking sector, David Carter, chief executive officer, banking and wealth at Suncorp says. “I suspect that credit growth is slowing,” Carter told Banking Day last week. “The S&P piece [the downgrade of credit ratings for many banks] has made people relook at all that data,” he
From ANZ: ANZ today announced a five basis point reduction in variable interest rates for customers paying principal and interest on their home loans, taking the bank’s standard variable rate for owner-occupiers to the lowest of major banks at 5.20%pa The decrease will benefit more than 80% of ANZ’s customers with an owner-occupier home loan.
Via Free Mortgages for All: The Australian Prudential Regulation Authority has been castigated by brokers for its nationwide “sledgehammer” crackdown on interest-only loans, which have been labelled as “myopic” and “devastating” for regional Australia. Damian Collins, managing director of Momentum Wealth in Perth, told The Adviser that APRA’s moves to limit the flow of new
Morgan Stanley thinks so: RBA’s Rock and a Harder Place After a big month in Australian macro, the RBA left the policy bias ‘on hold’, but noted weaker real income and consumption trends. We think policy tradeoffs have worsened, and expect the Bank to leave rates at 1.5% into 2019, despite our bottom of consensus
From the RBA today: At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent. The broad-based pick-up in the global economy is continuing. Labour markets have tightened further in many countries and forecasts for global growth have been revised up since last year. Above-trend growth is expected in
Sheesh: BankWest, a subsidiary of Commonwealth Bank of Australia, will today announce a 76 basis point interest rate rise for principal and interest home buyers, the latest twist in lenders’ attempts to slow borrowing and lower risk of bad debt on loan books as market sentiment sours. The bank is creating a new category of
Via Macquarie: Australia-US bond yield differential going negative? We think there is an even chance that Australian-US sovereign bond yield spreads fall below zero across the entire term structure (both short and long end) and potentially remain this way into late 2018. This was our expectation at the short end, but the rally in
ANZ has some good news for us. The offshore lenders that enable the housing bubble are getting nervous: London-based investors in Australia’s banks are fretting about the risk that several small and seemingly well-intentioned changes in housing market policies combine to create a sharp property market correction. ANZ Banking Group chief executive Shayne Elliott, who