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.
Roy Morgan has released inflations expectations for November, which has reached a seven year high: In November 2021 Australians expected inflation of 4.9% annually over the next two years, up 0.1% points, and the highest Inflation Expectations for seven years since November 2014. Inflation Expectations are now 0.2% points above the long-term average of 4.7%
By Gareth Aird, head of Australian economics at CBA: Key Points: Australian dwelling price growth is forecast to moderate over the first half of 2022 on higher fixed mortgage rates, affordability constraints and natural fatigue after a period of extraordinary price gains. A further tightening in macro-prudential policy looks unlikely in our view given higher
Deutsche with the note: The most important market event this week is likely to be on the future leadership of the Federal Reserve, as it’s been widely reported that President Biden is expected to announce his choice on who’ll be the next Fed Chair by Thanksgiving onThursday. Previous deadlines have slipped on this announcement, but
This is really out of the box now: Westpac has lifted its fixed rates for the third time in four weeks as the major banks retreat from record low lending rates eagerly snapped up by borrowers. The big bank moved to hike its owner-occupier and investor rates, leaving no loan package on offer for less
RBA Governor Phil Lowe yesterday gave an address to the Australian Business Economists (ABE) where he threw a wet blanket over market predictions that the cash rate will soon rise next year. Lowe first noted that inflation has undershot forecasts globally over the past decade, but is now on the rise; albeit appears temporary: The
Coolabah Capital with the note: Folks are starting to turn their minds to what life looks like after the end of the RBA’s bond purchase program (aka quantitative easing or QE). There’s a fairly robust consensus that Martin Place will look to accelerate its QE3 taper from $4 billion/week currently down to $2 billion/week in
Nordea with the note: Inflation or dumbflation? First, as the pandemic unfolds, you tell your population to hug Chinese people and call limiting international flights “xenophobic”. Soon thereafter, the media coverage of the virus scares the population so they stay indoors. And if they don’t, you lock them down. (In the US, Democrat voters believe it’s a 1-in-3
Coolabah Capital with the note: Banks are gradually hiking borrowing costs for a range of reasons that are worth understanding. The first is that these interest rates were being artificially suppressed by the RBA’s suite of cheap money policies. Two particularly potent initiatives were the Term Funding Facility, under which the RBA lent banks $188
You can thank the RBA for this little snafu: National Australia Bank has jacked up its fixed home loan rates for the second time in two weeks as lenders look to entice borrowers to variable offerings as wholesale funding costs march higher. Australia’s second-largest lender on Thursday hiked its fixed home loan rates by up
By Gareth Aird, head of Australian economics at CBA: Key Points: The RBA stated in the November 2021 Statement on Monetary Policy that their updated central scenario for the Australian economy is consistent with the first increase in the cash rate being in 2024. But the RBA’s updated central scenario is conditioned on a path
This is my base case as well: The hottest debate in economics this year has been whether rising prices will be sticky or short-lived. And “team transitory” just got a nod of support from Citigroup. While inflation will likely keep climbing in the next few months, the bank’s strategists led by Scott Chronert are urging
The dirty little secret at the heart of crypto is that its structure is a joke. The stablecoins that purport to underpin a $3tr crypto market cap are just $130bn of opaque and dubious assets. Via the Fed’s new financial stability report: Some stablecoins are vulnerable, and the sector continues to grow Stablecoins are digital
As noted over the past week, the RBA’s bond market back-up is going to kill sub-2% fixed-rate mortgages in short order. To wit: Westpac has hiked its fixed mortgage rates for a second time in three weeks, becoming the first major bank to increase home loan rates in response to Tuesday’s decision by the Reserve
Yesterday Australia saw the first hint of an impact from the iron ore crash in its trade account. I have taken the liberty of describing what I think is coming for Australia’s trade account over the next year as commodity prices keep falling: When a trade surplus falls it results in a few different outcomes.
The RBA just now: At its meeting today, the Board decided to: maintain the cash rate target at 10 basis points and the interest rate on Exchange Settlement balances at zero per cent continue to purchase government securities at the rate of $4 billion a week until at least mid February 2022 discontinue the target of 10 basis points
Deutsche with the note: I’m going to open the market section this morning with a line I don’t think I’ve written in 27 years of market commentary and probably won’t again. And it’s not about England thrashing Australia at cricket on Saturday. Yes the most important event of the week could be the RBA meeting
Treasurer Josh Frydenberg panicked late Friday: The inflation genie is not out of the bottle, Treasurer Josh Frydenberg insists, as the Morrison government tries to calm investors and households spooked by the global inflation-led bond sell-off that stormed Australia’s shores this week. Mr Frydenberg said inflation had risen globally and was expected to persist longer
Wow. What a screw-up this is: The Reserve Bank of Australia defied market expectations by opting against defending its yield-target on Friday, a decision that is fueling speculation that policy makers are set to abandon the program. Traders pushed the yield on the April 2024 note — which the bank aims to hold around 0.1%
Oh, the panic is on now! Chris Joye from Cooolabah with the note: Even 100 basis points of RBA cash rate increases would have profound consequences for asset pricing. Combined with some out-of-cycle rises from banks courtesy of normalising funding costs, this would probably force house prices, for example, to correct about 15 to 25
Nomura’s robot whisperer Charlie McElligott with the note: More wafts of VaR-napalm eminating from Macro HF pods with fresh Rates calamity overnight, as RBA inaction on the enforcement on its yield curve targeting mechanism saw 2Y yields spike and blow-out above 0.50% vs the target at 0.10% (deceased), calling into question the very existence of
What a historic spanking. For a few months now Aussie inflation hawks have been testing the RBA’s commitment to yield curve control. Last week they forced it to buy more bonds. Yesterday, markets applied the blow torch to short-end bond yields, following Wednesday’s three-month-old inflation number, and the RBA folded like a crack whore needing
Economist Gerard Minack has written a note warning that rebooting Australia’s mass immigration program will crush wage growth and prevent the RBA from achieving its wage targets, which will keep inflation lower for longer: Stagnant incomes and below-target inflation [over the last decade] were due to low wage growth. Wage growth was low because there
Yesterday’s Aussie bond action was borderline hysterical as the belly of the course threatens to jackknife into inversion with the long and the RBA’s yield curve control has been obliterated: The US curve was also crushed though its long-end was bid impressively: Spreads to the US blew out at the longer end putting upwards pressure
Australia’s Consumer Price Index (CPI) came in at 0.8% in the September quarter – in line with market expectations of a 0.8% rise: Annual CPI retraced to 3.0%, missing expectations of a 3.1% rise. This was down on the June quarter’s 3.8% CPI increase, which was driven by the ‘base effect’ (since CPI fell by
NSW is rotten, politically. Chris Joye with the note on Friday: Two big dramas playing out this week are the bond market trying to bully Martin Place into tightening monetary policy and allegations that NSW premier Dominic Perrottet’s otherwise remarkable debt retirement fund, which saved taxpayers from a fiscal crisis, has funneled $450 million to
UBS with the note: Investors have challenged the RBA (again), as rate hikes are priced everywhere Market pricing for RBA hikes moved materially in recent weeks, propelled by the shift in global front-end rates. There are currently ~70bps of hikes priced by the end of 2022, and ~120bps by the end of 2024 (with UBS
The Kouk windvane is back: For the first time in many years, central bankers and global investors are witnessing a material pick-up in inflation. Despite the evidence, which shows inflation lifting to levels well above target, the reaction of central bankers and investors has so far been muted. …Bond markets, which inevitably move well before central
A nice example of how crazy the inflation debate has gotten in the last few weeks comes from Nordea, a generally very sensible crew: The transitory vs. permanent inflation debate seems to be over as almost all consensus economists except for Christine Lagarde have started to warn against the current inflation pressure. The dark horse
By Gareth Aird, head of Australian economics at CBA Key Points: We expect the headline CPI to increase by 0.8% in Q3 21 (+3.0/yr). The trimmed mean CPI on our forecasts will print at +0.5% (1.8%/yr). The lift in consumer inflation in Australia will lag a number of other advanced economies, but we believe it’s
Aussie bond yields have backed up spectacularly in recent weeks. It began with the shift from zero COVID to living with the virus but most of it is the energy crisis that has sent coal and LNG prices to ludicrous levels: The curve has steepened markedly as well: Spreads to the US have flipped positive
