Ray Dalio is: Central Banks’ Reversals Signal the End of One Era and the Beginning of Another For the last nine years, central banks drove interest rates to nil and pumped money into the system creating favorable carries and abundant cash. These actions pushed up asset prices, drove nominal interest rates below nominal growth 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.
The AFR is whining like a baby today led by former Commonwealth Bank of Australia CFO David Craig: “No international investor has bought a share in an Australian bank for the last month or two as far as I understand,” he says. “Basically the sovereign risk – the fear of what is happening here – has them
Via the AFR: AMP, the nation’s largest financial services group, is banning property buyers using their mortgage as a “piggy bank” for personal spending, escalating lenders’ response to regulatory pressure to rein-in ballooning household debt. It follows Commonwealth Bank of Australia’s decision to crack down on issuing credit cards to property borrowers, also a response
By Leith van Onselen As banks increase their rates on interest-only and investor mortgage loans, data from Canstar shows that just 15 out of 75 Australian lenders have increased their term deposit interest rates since the last official interest rate cut in August 2016. Steve Mickenbecker of Canstar says term deposit rates have fallen to
Via WSJ comes the RBA’s Ian Harper: We’re on target, but to be blunt there is also plenty of evidence that you wouldn’t want to rush this (raising rates).” “There is still plenty of underemployment” and “it is not clear that inflation is rising” “We are not calling the economy dead. Things are recovering nicely.
Via Domainfax: A single buyer snapped up all $800 million of Australian government bonds sold on Wednesday, the largest ever amount bought by one bidder in auctions that date back to 1982. The sale of a nominal bond to just one entity hasn’t happened since August 2013, according to data from the Australian Office of Financial
Via the AFR: A minority group of economists have dumped their forecasts that the Reserve Bank of Australia will cut official interest rates again as the global central banking tide begins to change direction. Su-Lin Ong, a seasoned economist at RBC Capital Markets, is the latest to join the shift, saying on Wednesday she now
From Matthew Hassan: As widely expected, the RBA left the official cash rate unchanged at 1.50% at its July meeting. The Governor’s decision statement was also largely the same as in June with no substantive changes to the key closing paragraphs and other tweaks mostly minor and even-handed in terms of policy implications. Indeed, there
The RBA statement: At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent. The broad-based pick-up in the global economy is continuing. Labour markets have tightened further in many countries and forecasts for global growth have been revised up since last year. Above-trend growth is expected in a number of
From Bendigo: Managing director Mike Hirst said the changes reflect the requirement to meet the regulator’s expectations while responding to the ultra-competitive owner occupied mortgage pricing market for new lending. “When setting interest rates our bank needs to consider many factors and carefully take into account the needs of our stakeholders including customers, shareholders, staff,
Via UBS: Are the major banks setting RBA monetary policy? The Australian monetary policy regime is shifting. Historically, the almost single driver of monetary policy settings in Australia was the RBA’s cash rate. Indeed, there used to be a very strong causality of RBA cash rate moves with borrowing rates. With 85-90% of mortgages on
Via Macquarie: We estimate that out-of-cycle interest rate hikes announced over the last 12 months reduced overall households’ incomes by ~$5bn. Furthermore a gradual shift from IO to P&I would take off additional $5-10bn from discretionary incomes or savings. However, given the distribution of debt, we estimate that ~60% of the reduction in discretionary incomes
From the RBA Shadow today: Australia’s economic outlook remains mixed. The unemployment rate unexpectedly fell to 5.5%, while headline inflation remains well contained. On the other hand, household debt continues to break new records, raising concerns about a possible housing crash in the major capital cities. The RBA Shadow Board continues to advocate a hold-and-wait
From Australian Broker: ME today announced several changes across its home loan portfolio. The Bank will decrease by 10 basis points its principal-and-interest variable home loan offer to new owner-occupier borrowers who are applying for a loan in a member package valued at $150,000 or more and with an LVR at 80% or less. It
From Bloxo today following his mentor Mr Rainbow: RBA tactics and commentary The improvement in the local labour market and business conditions as well as improving global economic conditions and a recent shift in rhetoric at other central banks will all act to re-affirm the RBA’s view that it will not need to cut the
Mr Rainbow is on the run at the New Daily: A widely-misreported warning of eight rate hikes in two years would in fact be good news for the economy, according to the man who made the prediction. Dr John Edwards, former economic advisor to Paul Keating, former RBA board member and former chief economist at HSBC, struck fear
What’s so cheered central bankers worldwide in recent days? NAB asks: “Why have central banks become hawkish all of a sudden?” The link between monetary policy and the real economy is working The link between a growing real economy and inflation is more subdued than in the past, but the factors holding this back are
A speech from Wayne Byers yesterday certainly sets such up (cut to the end for the money quote): WAYNE BYRES Chairman The American Chamber of Commerce in Australia Business Briefing, Sydney 28 June 2017 Thank you for the invitation to speak this afternoon. I intend to talk today about international standards and national interests.1 The intersection
John Edwards AKA Mr Rainbow is back: Shrugging off slow first quarter growth in the US economy, the Federal Reserve increased its policy interest rate earlier this month, and intends to do more. Not long after, minutes of a meeting of the Bank of England’s Monetary Policy Committee surprised markets by revealing that three of
Via Banking Day: Westpac has swung the axe on a range of alternative mortgages marketed by its Bank of Melbourne and Bank SA subsidiaries. In identically worded memos sent to mortgage brokers on Tuesday, BoM and Bank SA announced that their fixed and variable rate low doc home loans would be withdrawn from sale on
The rarely useful Elizabeth Knight put her finger on something over the weekend: There is a hidden and worrying risk lurking for a particular set of mortgage borrowers, whose level of financial stress is about to get a whole lot worse. It’s those home owners with interest-only loans that are now increasingly under the pump
From NAB: NAB has today announced changes to its variable home loan interest rates, effective Friday 30 June 2017. The following three changes have been announced: The interest rate for owner occupiers making principal and interest repayments will decrease by 0.08% per annum, to 5.24% per annum The interest rate for owner occupiers making interest
A fading China, downgrades, levies, housing bubbles and no growth. Why would you own an Aussie bank? UBS see more to come: South Australia hits the banks with a further State Bank Levy In today’s South Australian budget, Treasurer Tom Koutsantonis announced it will be introducing a state based Bank Levy on the Major banks
The conniption begins, from Chanticleer: Bad policy clearly breeds bad policy, as shown by South Australia’s $370 million tax on the big four banks and Macquarie Group. But South Australian Treasurer Tom Koutsantonis has created a problem for himself by aligning his “super profits” tax on the banks with the state’s share of the national