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.
Via Westpac: • Westpac’s forecast for the March quarter CPI is 0.1%qtr with the annual pace easing back to 1.4%yr from 1.8%yr. • The March quarter is a seasonally soft quarter with the ABS projecting a seasonal factor of +0.2ppt. The seasonally adjusted CPI is forecast to rise 0.3%. • Core inflation is forecast to
It certainly got overbought as we know, via Credit Suisse: And yields have been rising now for few weeks: The curve has also steepened a little: Though spreads to the US have not really compressed much at all: I still expect the Aussie economy to be dragged into the housing bust throughout H2 and the RBA
Via the excellent Damien Boey at Credit Suisse: We think that the RBA will cut rates, probably in 2H. For further discussion of this view, please see our recent article “Can you feel the tension at the RBA” dated 20 March 2019. But we also think that officials are thinking about monetary policy with reference
Via the excellent George Tharenou at UBS: Based on our proprietary survey, we cut our Q1 headline CPI forecast to 0.0% q/q (was 0.2%), a sharp slowing from Q4’s 0.5%. This would be the weakest in 3 years, & lower for only 3 quarters in the last 22 years. The key drag is fuel (-9.6%,
Via Westpac: The RBA minutes clearly indicate that they are willing to cut the cash rate and have set out the conditions that need to be fulfilled for it to occur. We are encouraged by this new detail, and continue to believe the RBA will cut the cash rate in August and November this year.
Dovish RBA minutes out just now: International Economic Conditions Members commenced their discussion by noting that the slower pace of global economic activity had continued in recent months. This had been particularly evident in the manufacturing sector. Survey measures of conditions in the manufacturing sector had declined across a range of economies, although they had
CLSA’s excellent Brian Johnston is on the money here: Veteran CLSA bank analyst Brian Johnson said while funding costs had fallen, margins were still under pressure due to increased costs as investors coming to the end of their interest-only periods are forced to switch mortgage products to pay off both the principal and interest. Switching
The new RBA Financial Stability Review is out and brimming with anxiety: Risks to the household sector have increased over the past six months given weak housing market conditions. Housing prices have fallen significantly in Sydney and Melbourne after the earlier large run-up in prices, while in Perth and other miningexposed regions, prices have been
Via the AFR’s Patrick Commins: The RBA still has the potential to cut rates further, but by this stage that just looks like a case of indulging in “the hair of the dog that bit you”. I would argue a more effective and targeted way to support the housing market right now would be to
Via the excellent Damien Boey at Credit Suisse: In recent times, we have seen a number of central bankers attempt to jawbone the yield curve steeper, or at least, downplay the significance of flat-to-inverted curves. And all have failed: RBA Deputy Governor Debelle suggested that 10-year bond yields are artificially low relative to terminal rate
Because what Australia needs is more deflation! DXY eased last night as EUR rose: AUD launched against DMs: But was mercifully weaker than EMs: Gold tacked on gains: Oil is parabolic: Metals are still soft: Miners too: EM stocks ground higher: US junk jumped: As Treasuries were bought: Bunds too: The lunatic RBA has killed
We’ve seen suicide bombings by Ian Harper, Phil Lowe, Christopher Kent, Michelle Bullock, Luci Ellis and today it is Guy Debelle: Thank you very much to AmCham for giving me the opportunity to speak in my home town of Adelaide. Today I am going to discuss the Bank’s assessment of the current economic situation both in
Via The Australian: O’Sullivan’s commission could do irreparable damage to the financial system. Everybody’s job, everybody’s mortgage, every loan to every business in the country was dependent on the strength and credibility of the financial system, they said, and O’Sullivan was about to lift the lid on a Pandora’s box. With the help of a
Via the AFR comes the IMF in an unusual break with the tradition of agreeing with whatever the locals say: Australia’s housing market contraction is worse than first thought, says a top IMF analyst, leaving the economy in what he called a “delicate situation” that boosts the need for faster infrastructure spending and even potential interest
On Tuesday we noted a significant change in the Statement by the Reserve Bank Governor: “Our research showed that there has been a very significant change in the Governor’s Statement for this month. Recall that Governor Lowe has not changed monetary policy since he became Governor in September 2016. Also note that the key concluding
We warned BofAML in January that it was wrong: We continue to expect the RBA to remain on hold this year but concede the case for hikes in 2020 has weakened. …The change in dynamics is more centered on the outlook for global growth, in our view, rather than a step change in the risks
Via UBS: Implications: smaller than expected stimulus raises risk of early/more RBA cuts Overall, as we flagged, the Budget improved modestly due to higher commodities & fiscal conservatism, with the surplus profile supporting the AAA. Household tax cuts & handouts were much smaller than expected; while infrastructure & public demand slow sharply. With credit tightening
After a weak stimulus Budget the short end of the Australian curve has been bought bigly with the three year yield sinking to all-time lows: Other durations are also bid: But here has been a little steepening of the curve post-China data: The short end spreads are keeping the pressure on the AUD: Rate cuts
Via Bill Evans at Westpac: As expected, the Reserve Bank Board decided to leave the cash rate unchanged at 1.50%. However, our research shows that there has been a very significant change in the Governor’s Statement for this month. Recall that Governor Lowe has not changed monetary policy since he became Governor in September 2016.
It would save the Budget $1m a year to keep the cash rate at neutral forever without all of the fuss: Markets have stopped believing Dr Lowe anyway with the AUD selling hard when he held his neutral position: And bond markets bidding aggressively: The brick is cheap and incorruptible. More to point for market
The Reserve Bank of Australia is out with its latest policy decision and the word is At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent. The outlook for the global economy remains reasonable, although growth has slowed and downside risks have increased. Growth in international trade has declined and
Via the excellent Damien Boey at Credit Suisse: US Treasuries sold off aggressively overnight on upside surprises in manufacturing PMI readings for the US and China. We are not surprised by weakness in US Treasuries, nor reflation coming out of China. After all, we are long resources stocks in our model portfolio, and have flagged
This is so bad I don’t know where to look, from HSBC’s Bloxo: It is clear that the bar for the RBA cutting its cash rate is very high. It remains our view that while the labour market still has positive momentum the RBA will be able to credibly argue that wages growth should continue
Via Westpac: Tuesday’s RBA Board meeting has taken on extra importance given the surprise RBNZ decision to switch to an easing bias. While we do not expect a similar shift, there is a significant dovish market contingent impatient for the RBA to capitulate, so price action will be highly sensitive to the Governor’s Statement and
It’s like herding cats! From the lunatic Shadow: Australia’s economy, in spite of its relatively low unemployment rate of 4.9%, is showing sign of weakness. CPI inflation, most recently equal to 1.8% in the December quarter, remains below the Reserve Bank of Australia’s official target band of 2-3%. Consumer and business confidence measures are softening,
Straight from the horse’s mouth, via Chanticleer: …up in Hong Kong, as least one of the Big Four was making it very clear that full pass-through was unlikely; the bank was keen that investors particularly understood that deposit rates at zero gave it very little room to move. If we assume that somewhere between 10
Says ANZ: We expect no change to RBA policy as the labour market remains strong. The tone will likely remain cautious, however, owing to risks associated with housing, credit conditions and labour market expectations. Risks remain balanced as strong unemployment data have been offset by the weaker 4Q GDP and soft leading indicators The government
APRA’s monthly banking statistics have nothing but bad news for house price. Here are the year on year growth rates in investor mortgages in the big eight banks: ANZ CBA MQG NAB WBC BOQ BEN SUN Total Feb-19 -4.5 0.0 43.2 0.6 0.4 0.2 7.3 -1.3 0.4 Jan-19 -4.2 -0.1 44.4 0.7 0.9 0.8 7.0
Via UBS’s excellent George Theranou: Households are still leveraging. Even though household liabilities growth dropped to a >5-year low of 4.2% y/y, because nominal income growth collapsed even more to just 2.0% y/y, the household debt-to-liabilities ratio lifted to a record high of 199% in Q4- 18. However, mainly due to falling house prices, household
Via Bill Evans at Westpac: In previous years the Reserve Bank has generally observed that fiscal policy has had only a very limited bearing on monetary policy decisions. It is reasonable to contemplate whether 2019 will be different. Firstly, if we take the expected approach from the Budget (an expansionary budget with a focus on
