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 the AFR today: Economists at QIC, Laminar Capital and Bank of America Merrill Lynch argue that since November better than expected jobs numbers, retail trade figures, house prices and approvals, and more optimistic trade and sharemarket news will see the Reserve Bank hold fire, despite the temporary hit to the economy from bushfires. …Former
Front page at The Australian over the weekend: Booming share prices, record household debt and a resurgent property market are increasing pressure on the Reserve Bank to hold fire on further interest rate cuts, despite the economy absorbing a hit from the bushfire crisis, which has rocked the agricultural and tourism sectors. …Former RBA board
Via the excellent George Theranou at UBS: Following coordinated policy easing by APRA & the RBA, home loan values rebounded 18% in the 6 months to November, seeing home prices lift >10% annualised, moving quickly towards our ‘mini-boom’ forecast of 10% y/y, especially with the RBA to keep easing. However, we still think ‘this time
The long bond yield hit its lowest level this year today: The remainder of the curve is still slightly above the lows. It has been flattening over the past few weeks, partially reversing what was only a weak steepening through late 2019: This has largely been a global phenomenon as bond markets refuse to buy
Gottiboff is excited: There is increasing evidence that Reserve Bank Governor Philip Lowe and his people are significant contributors to the increase in pessimism by so many Australians. …Now bushfire relief and recovery has given the government a justifiable reason to spend that surplus and more. The big bushfire spending proposals of the federal government
Better late than never, I guess. Bloxo via the AFR: In June 2019, the RBA published its new estimates of unemployment. Whereas previously the central bank had thought that unemployment was around 5 per cent it was now estimating it to be around 4.5 per cent. …In making this reassessment the RBA gave up on
A growing number of economists have called on the Reserve Bank of Australia (RBA) to lower its inflation target from 2% to 3%, in order to bring it into line with global peers: Yarra Capital Management macro and strategy chief Tom Toohey said: “The RBA remains in the unenviable position of not being able to
Because that’s how good the global and Australian recovery will be in 2020. Bonds have just about completed pricing the first rate hike: This is largely being driven by global steepening as stocks run wild: But is has also been the result of local bonds selling faster than US, narrowing the spread: A few checks
Going nowhere fast, from the RBA: All growth rates for the financial aggregates are seasonally adjusted, and adjusted for the effects of breaks in the series as recorded in the notes to the tables listed below. Data for the levels of financial aggregates are not adjusted for series breaks, and growth rates should not be
What happens when you put a micro-economimc guy in charge of macro-economic policy? This: Rushing to cut interest rates further could have risked overstimulating the economy, says Reserve Bank board member Ian Harper. …“Lags in monetary policy have always been long and variable, and in this environment you don’t want to jump the gun (with
Via Bill Evans at Westpac: The minutes of the December monetary policy meeting of the Reserve Bank Board have made it clear that the Board will be reassessing the economic outlook next February. Whilst it seems reasonable at the end of the year to note that a review will occur at the beginning of the
Via Martin North: The Australian Prudential Regulation Authority (APRA) has today formally commenced an investigation into possible breaches of the Banking Act 1959 by Westpac Banking Corporation (Westpac). APRA will focus on the conduct that led to the matters alleged last month by AUSTRAC, as well as the bank’s actions to rectify and remediate the
Has the RBA been hacked or what? More sense from The Bulletin from Kellie Bellrose and David Norman: Abstract Australian banks access large and deep foreign funding markets to supplement their domestic funding. Looking at the major banks’ worldwide operations, such offshore funding accounts for about one-third of their assets. This funding is raised in
Via the AFR: “As a result of lower long-term interest rates our cost of capital has naturally lowered over recent years,” Medibank chief executive Craig Drummond told The Australian Financial Review’s annual Chanticleer CEO poll. “Nevertheless, those lower interest rates have elevated asset prices, making inorganic investment more challenging.” Tabcorp chief executive David Attenborough backed this
Via Credit Suisse: The Fed’s liquidity operations have not been sufficient to relax the constraints banks will face in the upcoming year-end turn. Reserves are still insufficient; there are no true “excess” reserves; and large U.S. banks’ G-SIB scores are shaping up to be a severe binding constraint heading into the year-end turn. We have
Via the excellent George Tharenou at UBS: Treasurer Frydenberg will soon release the Commonwealth Budget update (MYEFO), likely on December 16. Positively, the Final Budget Outcome for 18/19 already beat April’s Budget estimate by a significant $3.5bn (UCB basis), with the $0.7bn deficit outcome (i.e. ~’balanced’) the smallest since the GFC. Furthermore, monthly data for
Phil Lowe and the RBA’s toxic optimism rolls on: says GDP outcome was broadly in line with our expectations weakness of consumption was a surprise still confident people will spend extra income says evidence is people will spend tax rebates, may take longer this time says weakness of Q3 consumption does not have particular messages
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
