It’s RBA day and Domain is pining for times lost: Increasing real interest rates and Victoria’s stage-four lockdown will force the Reserve Bank to re-examine policy settings and its forecasts for the national economy amid growing evidence the jobs market has deteriorated in the past fortnight. The RBA board is expected to hold official interest
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.
Special report from Gerard Minack: Monetising deficits has started. Expect it to stay. The helicopters have arrived. Central banks are printing money to fund expanding government deficits. I expect them to stay: fiscal will remain the lead instrument for cycle management through the coming expansion, and it will be backstopped by central banks. Deployed with
Here is the truth of it once you peel away all of the politicised bull. Via Reuters: The U.S. economy could benefit if the nation were to “lock down really hard” for four to six weeks, a top Federal Reserve official said on Sunday, adding that Congress can well afford large sums for coronavirus relief
Via Banking Day: At-call and term deposit rates continued to fall last month, in what comparison site Mozo called “a significant retreat”. AMP made some of the biggest cuts, reducing the six-month introductory rate on its Saver account by 70 basis points to 1.5 per cent and the ongoing bonus rate on its Bett3r account
Various discredited economists and pollies are still busying themselves with the game of politics as the body count rises: Good to see a bipartisan approach to MMT – let’s not waste any more time on this & look for policies that will make a meaningful and lasting difference to the economy and people’s lives https://t.co/rew6D6594I
He pretty much only has one task. Keeping inflation in the 2-3% band. Yet he has failed utterly for four straight years. On headline inflation: Trimmed mean: Core: Inflation expectations: And wages: Phil Lowe has managed to produce the worst period of falling living standards in modern Australian history and is, before our very
So shockingly predictable (if you’ll pardon the oxymoron): The Australian Prudential Regulation Authority (APRA) has updated its capital management guidance for banks and insurers, in particular easing restrictions around paying dividends as institutions continue to manage the disruption caused by COVID-19. APRA’s updated guidance replaces its recommendation in April this year that banks and insurers “seriously consider
Via a smug RBA putting the cue in the rack. Christopher Kent: Introduction In the early stages of the pandemic, there was extreme uncertainty about how much economic activity would decline and how long the economic disruption would last. It was also uncertain how much support would be provided by monetary and fiscal authorities. And
DXY was thumped last night as EUR surges: But it couldn’t touch the Australian dollar which went mad: Not so much against EMs: Gold launched as well: And oil: Dirt a little: Miners were soft: EMs stocks gapped: Junk too: Bonds are stone dead: Stocks were mixed: The only chart that matters took off again
Via Bloomie: While bets on steepening yield curves are growing in popularity, money can also be made in countries that already have one and that’s drawing investors Down Under. Thanks to Australia’s yield-curve control policy, its bonds have the steepest curve among major sovereign markets, according to two- and 10-year note data compiled by Bloomberg.
Via Ambrose Evans-Pritchard: Global bond markets refuse to ratify a V-shaped economic recovery. Futures contracts in fixed income derivatives are even more bearish, signalling nothing less than a worldwide deflationary slump as far as the eye can see. “If markets are pricing a ‘V’, they’re going about it in an odd way,” says Andrew Sheets
Via Damien Boey at Credit Suisse: An un-natural vision of stability. The US trade deficit, a proxy for foreigners’ US dollar (USD) saving, is exhibiting remarkable stability of late. Ordinarily, stability tells us that there is nothing further to see – but sometimes, it can actually be a deceptive sign of instability. Consider that the national accounting identity says that
Deputy Governor of the Lunatic RBA, Guy Debelle, today: The Reserve Bank’s Policy Actions and Balance Sheet Australia is experiencing an historic event. It is first and foremost a health event. Thankfully, thus far the health outcomes in Australia have been better than feared. The health decisions taken by the government and the public in
The AFR has today used a journalist to declare that a journalist has no authority to discuss MMT (I mean, how would he know?): Out there, on the wild fringes of economics, modern monetary theory is picking up momentum. MMT, as it is known, is a panacea for troubled times. Government deficits don’t matter, printing
From the ABC: Extraordinary tv with @AlanKohler. Turns out government debt is no big deal. The central bank can buy it and write it off. Inflation fears don’t seem supported by the evidence. Bank of Japan owns half of its gov debt. Yet they are battling deflation!https://t.co/IUPCkMO9iq — Cameron Murray (@DrCameronMurray) June 24, 2020
Lordy, COVID-19 is exposing the Kouk as an economist of such throwaway views that he might well claim the earth is flat shortly: Where do you think the $7.0b “to private bank accounts” comes from? It is from the savings in – wait for it – private bank accounts (household savings /super funds / insurance
Via the excellent Damien Boey at Credit Suisse: The world is not in deflation despite a sharper recession than the 2008 global financial crisis. In the “Great Moderation” era, economists have used output gaps to understand and predict inflation. Above (below) trend levels of activity, or activity growth, have historically been consistent with accelerating (decelerating) inflation. And over the years, we have seen some
As the Australian dollar’s unruly melt-up continues let’s revisit what the RBA said yesterday: At its meeting today, the Board decided to maintain the current policy settings, including the targets for the cash rate and the yield on 3-year Australian Government bonds of 25 basis points. The global economy is experiencing a severe downturn as countries
Via the excellent Damien Boey at Credit Suisse: Credit growth surprises materially to the downside. Bank credit was unchanged in April, compared with the Consensus forecast for 0.6% monthly growth. Year-ended growth slowed to 3.6% from an upwardly revised 3.7%, versus expectations for a pick up to 4% . Compositionally, business and housing credit rose moderately, while personal credit fell. Arguably the
Via the excellent Damien Boey at Credit Suisse: Activity bottoming out. May purchasing managers indices (PMIs) for Australia and major economies reveal a bottoming out process in train. PMIs everywhere are rising sharply off their historical lows. To be sure, PMIs are diffusion indices, meaning that their level corresponds with a rate of change in activity, and sufficiently high readings are necessary to
Via the excellent Damien Boey at Credit Suisse: Fed minutes reveal preference for yield curve control. Minutes from the Fed’s late April meeting reveal that officials were concerned about slow recovery, permanent scars on the economy from the crisis, and a potential second wave of the outbreak. There was no mention of negative interest rates
Via the excellent Damien Boey at Credit Suisse: Real yield curve model points to steepening, but … We define the Australian real yield curve as the 10-year inflation-indexed bond yield minus the real 3-month interbank rate, using the inflation swaps curve to profile long- and short-term inflation expectations. Our proprietary model of the real yield curve
Via the excellent Damien Boey at Credit Suisse: Fed Chair Powell guides negatively. In an ad hoc speech, Fed Chair Powell said that the economy faces unprecedented risks from COVID-19 if fiscal and monetary policy makers do not step up to the challenge. He suggested that the recovery could take time to gather momentum, and that the present liquidity