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 Bill Evans of Westpac: The Australian economy grew by a disappointing 0.4% in the September quarter for annual growth of 1.7%. Of most concern is that this represents the fifth consecutive quarter where private final demand, which declined by 0.3% in September, either contracted or was flat. Within private final demand the most surprising
Via Chris Joye today: As this column feared, the government is losing control of its otherwise impressive fiscal policy legacy as the Reserve Bank of Australia seeks to deflect blame for its failure to hit its legislated inflation and employment targets. This is emerging as one of the key tests of Treasurer Josh Frydenberg’s political
Bravo RBNZ again: The Reserve Bank of New Zealand today released its final decisions following its comprehensive review of its capital framework for banks, known as the Capital Review. Governor Adrian Orr said the decisions to increase capital requirements are about making the banking system safer for all New Zealanders, and will ensure bank owners have
In his recent speech describing unconventional policy options, Governor Phil Lowe noted that: The fourth policy response was forward guidance. This took two forms: calendar based and state based. Under calendar-based guidance, the central bank makes an explicit commitment not to increase interest rates until a certain point in time. Under state-based guidance, the central
Via Banking Day: Citibank is facing a backlash from politicians and consumer groups this morning after moving to claw back recent home loan rate cuts from new borrowers. In a controversial move that undermines the Reserve Bank’s efforts to relieve pressure on household budgets and boost spending in the economy, Citi yesterday became the first
Those looking for imminent macroprudential will be disappointed I fear. From the Council of Financial Regulators: Financing conditions and the housing market. Council members discussed trends in credit and recent developments in the housing market. Growth in housing credit remains subdued overall, with credit to investors particularly weak. Owner-occupier loan commitments and housing turnover in
Via Bill Evans at Westpac: As expected, the Reserve Bank Board decided to leave the cash rate unchanged at 0.75%. The key themes around the policy outlook which have been consistently promoted in these RBA statements in recent months have been repeated today. Firstly, the Board “continues to monitor developments, including in the labour market”,
The RBA decision is out and holds no great surprises with no move but a strong easing bias: At its meeting today, the Board decided to leave the cash rate unchanged at 0.75 per cent. The outlook for the global economy remains reasonable. While the risks are still tilted to the downside, some of these risks have
At the AFR, monetary curmudgeon Stephen Grneville is making sense: Rating agency Standard and Poors has just issued its usual finger-wagging warning to Australia about the dangers of budget deficits. …The issue of the moment, however, is what to do about an economy which is performing well enough, but growing just a little too slowly
Having missed every signal under the Sun for as far back as I can remember: Rates Should Stay on Hold Into the New Year The unemployment rate ticked up to 5.3% in October, while real wage growth fell further, to 0.5%. Australia’s inflation rate, at 1.7% in the September quarter, remains below the Reserve Bank
Via Bill Evans of Westpac on the RBA and the Australian dollar: The Reserve Bank Board meets next week on December 3. As we have argued consistently, despite confident market pricing at various stages over the last few months, we see little chance that the Board will decide to change the cash rate in December.
Via Westpac’s Andrew Hanlan: 2019/20 capex plans Overview Capex plans for 2019/20 have been downgraded, largely led by services. Business capex plans are lopsided, with strength in mining and weakness in services. This is consistent with the fundamentals (a challenging and uncertain global backdrop and weak demand domestically) and consistent with our reading of the
Bill Evans of Westpac: Westpac now expects two rate cuts next year from the RBA with the cash rate cut to 0.25% in June 2020. Quantitative Easing is also expected to begin in the second half of 2020. Westpac has not changed its rate call for the RBA since July 24 this year. At that
Via the excellent Damien Boey at Credit Suisse: Overnight, RBA Governor delivered a speech about unconventional monetary policy, as it might apply in Australia. Key points were as follows: The Bank does not expect to get to quantitative easing, or negative interest rate policy in this cycle, because it expects gradual recovery towards its growth
From the Lunatic RBA last night: Unconventional Monetary Policy: Some Lessons From Overseas Philip Lowe, Governor Thank you for the invitation to address this year’s Annual Dinner of the Australian Business Economists. This is the fifth time I have had the privilege of joining you. Thank you for having me back. One recurring theme of
There is a gigantic lie abroad about Australia. It is that it has been lucky and has, to date, dodged the secular stagnation and associated effects that has afflicted Western economies worldwide after the GFC. Nothing could further from the truth. While the rest of world adopted quantitaive easing (QE) to address the issue, only
From the Lunatic RBA: Employment and Wages Guy Debelle Over much of the past three years, employment has grown at a healthy annual pace of 2½ per cent. This has been faster than we had expected, particularly so, given economic growth was slower than we had expected. Employment growth has also been faster than the working-age population
A week old but worth listening to. Nomura’s quant wizard, Charlie McElligott on why the bond bull is back on, at MacroVoices: Transcript:
Via Bill Evans at Westpac: The minutes of the November monetary policy meeting of the Reserve Bank Board give us no significant reason to change our view that the next rate cut will occur in February. While some forecasters have been promoting the idea of a move in December, the minutes provided the flavour of
Via Goldman: “We continue to lean towards the RBA reducing the cash rate to 0.5 per cent in the near term before remaining on hold over the next few years, with the pick up in growth and house prices easing pressure to deliver additional stimulus.” In turn, we don’t expect the RBA to pursue QE
Via the OECD today: Trade conflict, weak business investment and persistent political uncertainty are weighing on the world economy and raising the risk of long-term stagnation, according to the OECD’s latest Economic Outlook. World GDP growth is expected to be 2.9% this year – its lowest annual rate since the financial crisis – and remain at
From the RBA sockpuppet, Terry McCrann, today: The Reserve Bank did not “seriously ponder” a “shock” Cup Day rate cut — as some have interpreted, or rather misinterpreted, the minutes of that meeting. This is not just about getting ‘yesterday right’; it is even more important about not building in a misunderstanding of what the
Via Bill Evans at Westpac: The minutes of the November monetary policy meeting of the Reserve Bank Board give us no significant reason to change our view that the next rate cut will occur in February. While some forecasters have been promoting the idea of a move in December, these minutes provide the flavour of
Via the suddenly sane RBA: Minutes of the Monetary Policy Meeting of the Reserve Bank Board Members Present Philip Lowe (Governor and Chair), Guy Debelle (Deputy Governor), Mark Barnaba AM, Wendy Craik AM, Ian Harper, Steven Kennedy PSM, Allan Moss AO, Carol Schwartz AO, Catherine Tanna Others Present Luci Ellis (Assistant Governor, Economic), Christopher Kent (Assistant Governor, Financial Markets), Carl Schwartz (Deputy Head, Economic Analysis Department) Anthony Dickman (Secretary), Ellis Connolly (Deputy Secretary), Alexandra Heath
This is the right idea but for the wrong folks, at The Australian: One of the most important statistics calculated by Foreseechange is its “willingness to spend” data. This shows that retirees are the most willing to spend, followed by people in full time work without mortgage repayments. Retirees been savaged by lower interest rates
Peter Costello covered himself in glory again this week: Former federal treasurer Peter Costello says Australia’s monetary policy has probably run its course and believes some changes to responsible lending laws would stimulate the economy. Mr Costello said there was “a lot of intervention” following the Hayne royal commission earlier this year, which may have
Recessionberg is looking for tax cuts. Via Domain: The Morrison government is looking at ways to deliver tax relief to middle income earners as a much-needed boost to the economy after the nation suffered its biggest one-month fall in jobs in more than three years. Treasurer Josh Frydenberg said the government was “always looking” at
Via Justin Smirk at Westpac:: The October Labour Force Survey surprised with a –19.0k decline in employment – the market median was for 16k while the lowest forecast in the range was +7k. It was a surprisingly soft update all the more so for while the participation rate eased back to 66.0% from 66.1%, as
Via RBA sock puppet, Terry McCrann: Everyone seems to expect and many indeed lust for the Reserve Bank to embark on quantitative easing — printing money, but not for you but for the top end of town — except the only guys, non-gender specific, that matter. Those in the building at the top of Martin
Via Zero Hedge comes CTA wizard Charlie McElligott of Nomura: Nomura’s Charlie McElligott who echoed what we said on Saturday, writing that “the Treasury selloff feels “tactically tired,” with positioning now well-cleansed (massive duration sale from leveraged funds in the last reporting period, plus short-term CTA model now-having established their “short” TY and ED$ positions
