Australian interest rates

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.

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Gottiboff: Global rate hikes to trash Australian households

From Gottiboff today: Despite a few interruptions, US bond interest rates have been falling since the early 1980s as US bond prices rose, forcing yields lower. That bond boom is over. American interest rates in 2018 are now set to rise sending shockwaves around the world. Here in Australia the US directional change will edge

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And now for some property security bans for business loans

Via the AFR: ING is banning the use of some residential property as security for commercial loans in the latest sign that lenders are growing nervous about the outlook for property price growth. Commercial loan borrowers will also have to provide case-by-case evidence of higher levels of equity in their residential property, a proven record

13

Credit Suisse: Saving households to force more rate cuts

Via Credit Suisse’s excellent Damien Boey today: The RBA’s optimistic consumption thesis RBA officials are of the view that consumption growth should be quite solid on the back of job creation, a gradual pick up in real wage inflation, and a modest reduction in the household saving rate. To be sure, they see risks stemming

11

Bill Evans: Soggy economic outlook means rates on hold. China key risk

Here’s an excellent dissection of the Australian economy by Westpac chief economist, Bill Evans: As we contemplate 2018 and 2019 there are a number of key themes that we believe will dominate economic and market developments. Our advice to customers throughout 2017 has been to expect Australia’s growth rate to be anchored below trend in

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Half of mortgagees in “dire straits” with two rate hikes

Via Domainfax: More than half of Australian homeowners with a mortgage would be in dire straits if their repayments increased by more than $100 a month, new data shows. A nationwide survey found 54 per cent of borrowers do not think they could handle a repayment rise of more than $23 a week. Worse still,

19

RBA: Bitcoin/crypto “speculative mania”

Phil Lowe just now: Introduction Good morning. Welcome to High Security Printing Asia 2017 and, for those who have travelled from overseas, welcome to Melbourne, Australia. I take this opportunity to also acknowledge the traditional custodians of the land on which we are gathered, the people of the Kulin nation, and, on behalf of everyone here, pay

11

Gundlach: Huge bond bear market to come

Jeff Gundlach is at it again today predicting inflation and a big bond bear market. Here’s what he said in November: You heard it here first: Jeffrey Gundlach, CEO of DoubleLine Capital and one of the world’s most successful bond investors, predicted in January at the Barron’s Roundtable that Donald J. Trump would be the country’s next president, noting,

12

Shadow RBA weirdos’ macroprudential fatwa continues

From The Shadow RBA: Domestic and global economic indicators continue to paint a picture of a modest economic expansion with consumer price inflation remaining below the Reserve Bank of Australia’s official target band of 2-3%, official unemployment falling slightly and financial markets remaining bullish. For this month the RBA Shadow Board continues to advocate a

14

Japan’s tight labour market generates deflation…

Just a quick observation today as Japan released its October unemployment rate at 2.8%, way below supposed full employment. Yet it’s still waiting for wage inflation to kick in, for about  twenty years now… Japan is unique in some ways with its social contract between dead wood salarymen and other stabilising institutions, still as the

6

McKibbin recommends Australian recession

Via the AFR: Anticipating critics of normalisation – which may see the cash rate pushed towards 3.5 per cent – and who argue rate hikes will crunch heavily indebted households and cause an economic slump, Professor McKibbin said: “If we have become that vulnerable, do it now, not in a year when it’ll be much bigger.” “Let’s have

6

RBA boffin: Reserve Bank has become political fig leaf

From former head of research at the RBA, Peter Jonson: In developed nations, governments have opted for definitions of unemployment that make things look better than they really are. For over a decade, Roy Morgan Research (and myself) have been pointing this out. The latest Roy Morgan survey shows 2.3 million Australians unemployed or underemployed.

16

CBA tightens mortgage conditions

Via The Parasite: The big four bank has today revealed a raft of changes, including LVR caps and restrictions to rental income serviceability, that will impact mortgage brokers and their clients from next week. On Saturday (2 December), CBA will be introducing a new Home Loan Written Assessment document called the Credit Assessment Summary (CAS)

12

Australia/US yield spread inverts for first time in 17 years

It’s happened. The 2 year Australia/US bond yield has inverted for the first time in 17 years: There’s more ahead as US rate hikes are priced-in and Australian priced-out: Yet the markets remain mis-priced with Australian yields higher out the curve than US: Even though US growth prospects are clearly superior with: looming tax cuts;

12

PIMCO: Australian growth model tapped out

Via Robert Mead at PIMCO: Bond markets, which are forward-looking in their pricing, are clearly telling us that the prospects for Australia’s economy are expected to be weaker than the US’s, for the next few years, at least. For the first time in 20 years, short-term bond yields in Australia are approximately equal to, and arguably going

3

Will Hail Mary tax cuts trigger rate hikes?

Jacob Greber thinks so: For much of the past decade – and Friday marks exactly 10 years since the election of Kevin Rudd – economic leadership has been heavily underwritten by the Reserve Bank of Australia. …Throughout this clown show the Reserve Bank has steadily managed a remarkable post-boom landing for the economy. Often on its

4

Aussie bonds still a “buy”

Via the AFR: The weakness in bond markets that we’ve been warned of for half a decade will finally arrive in 2018 as inflation rises in the US while the global supply of bonds expands. …Mr Taylor is expecting the range of the ten-year bond rate to increase from 2 to 2.5 per cent to

16

Westpac tightens again

Via AFR: Westpac Group will this weekend upgrade its key measures for assessing property borrowers’ capacity to service their debt, amid intense pressure from regulators to provide better insights into households’ financial commitments and vulnerability to financial stress. The bank, which includes Bank of Melbourne, BankSA and Bank of St George, is the first to

7

Why an RBA rate hike looks a long way off

By Gareth Aird, Senior Economist at CBA: Key Points The outlook for inflation, wages, the consumer and the housing market suggests that monetary policy tightening looks a long way off. The market has ascribed a 50% chance of a rate rise by September 2018. We expect the cash rate to stay on hold until Q4

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Bill Evans: RBA getting depressed

From Westpac’s Bill Evans: There were no major surprises in the minutes of the Monetary Policy Meeting of the Reserve Bank Board for November. However, the general tone of the minutes seems somewhat more subdued than we have seen in recent reports. The Board is sticking with its expectation that inflation will increase but the