A nice pice today from economics greybeard Ross Gittins: I can’t remember a time when the arguments of all those bank and business economists claiming “the inflation genie is well and truly out of the bottle” and demanding the Reserve Bank raise interest rates immediately and repeatedly have been so unconvincing. At base, their problem
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 latest Australian interest rate forecast from the futures market predicts the Reserve Bank of Australia (RBA) will hike the cash rate from its current record low level of 0.10% to 2.5% by year’s end and to around 3.4% by September 2023: If the market’s prediction comes to fruition, then Australians would experience the equivalent
Mwahaha. There’s no sensible caution on interest rate forecasts at the ANZ like there is at CBA. ANZ has gone all-in on a massive ten rate hike cycle with a terminal rate above 3%: Eventually we see the cash rate reaching into the 3s. Given the strong inflation print, and reports from the RBA’s business
As reported earlier, Australia’s Consumer Price Index (CPI) came in white hot at 2.1% in the March quarter – smashing market expectations of a 1.7% rise: Annual CPI soared by 5.1%, beating expectations of a 4.6% rise: It was the largest quarterly and annual rise in CPI since the GST was introduced in 2000. Looking
The ABS has just released CPI data for the March quarter, with headline inflation surging by 2.1% over the quarter and by 5.1% year-on-year: Soaring petrol prices (Transport) drove the rise: Trimmed mean annual inflation, which excludes large price rises and falls, increased to 3.7% – the highest since March 2009: Both headline inflation (2.1%
We’ll get the inflation number today and it’ll blow out. The central bank should look straight through it. Why? Because there is a mounting deflationary shock globally as Europe is rocked by a war and energy shock. China is rocked by a property and COVID shock. And the US is rocked by an inflation and
Aussie inflation expectations have rocketed ahead of tomorrow’s March quarter CPI release by the Australian Bureau of Statistics (ABS). According to Roy Morgan, inflation expectations over the next two years soared by 0.7% to 5.8% in March to its highest level in almost a decade (September 2012): The increase in March was the biggest monthly
The latest interest rate markets from Westpac show no more awakening to sense and still pricing 14 rate hikes by mid-2023: Given house prices are already falling in Sydney and Melbourne, if markets are right, it will send prices into a downward spiral unseen in modern times. There is no way to know precisely
So says BofA. Australian long-end bonds will be heavily influenced by US yields. — Inflation mania We view the current level of 10y rates as a compelling location to go long for a 3-month horizon. The10-year rates reached a pandemic-high of 2.92% on Tuesday. While this is close to the 3.28% peak of November 2018,
I’ve been slow to move on the strength of the Aussie economy this year for two reasons. First, the China property accident led me to think that national income would be challenged later in the year. That might have been the case prior to the Ukraine war but the opposite has happened since. Second, the
Goldman has some good advice: Fed’s balance sheet unwind unlikely to support steeper curves. Minutes from the March FOMC revealed details about the Fed’s balance sheet reduction plan, which were largely in line with our expectations. The maximum cap is to be$95bn/month (split between $60bn for USTs and $35bn for MBS), roughly twice the pace
Let’s begin with shipping rates: Did you imagine lockdowns in Shanghai and Shenzhen would drive up the cost of transporting goods from China to Europe? If you did, then you’d be wrong. Here’s what’s happened to the price of taking a 40ft container’s-worth of goods from the Far East to Northern Europe on short notice:
Albert Edwards with an entertaining read. I don’t know where the US terminal rate level is, other than it is much lower than markets think. Moreover, if the SocGen estimate of real monetary tightening via QT is accurate then the question arises how can monetary conditions tighten enough so quickly to spook the Fed into
It’s a laugh a minute now for house price bears. Interest rate markets are now pricing nearly 14 straight interest rate hikes from the RBA by mid-2023: The recent bottom for the fixed interest-rate mortgage boom, which comprised 90%+ of new issuance, was around 2%. If markets are right, these will be rolling off at
It looks ugly for risk assets as it shrinks demand to fit constrained supply. Goldman: — BOTTOM LINE: The March FOMC minutes revealed some of the key parameters of the balance sheet reduction process, including that the monthly cap would likely be set at $95bn—split $60bn-$35bn between Treasury and mortgage-backed securities—and that the caps would
The Reserve Bank of Australia (RBA) is now widely tipped by economists to increase the cash rate in June. Shane Oliver of AMP Capital believes the RBA may adopt a more aggressive approach to interest rates at the start of the monetary policy tightening cycle, and a rate rise of 0.4% in June is possible.
Note from Westpac. — The Reserve Bank Governor surprised us on Tuesday with the Board’s decision to abandon its patient approach to monetary policy. Since the last Board meeting, when “patience” was emphasised, we have seen a further drop in the unemployment rate, from 4.2% to 4.0%, and a continuing surge in job vacancies pointing
The Reserve Bank of Australia (RBA) has updated its indicator lending rates for March, which shows mortgage rates across Australia rising: As shown in the above chart, the average discount variable mortgage rate finally rose by 0.15% from its pandemic low to 3.6% in March. The 3-year fixed mortgage rate also rose another 0.3% in
Find below RBA governor Phil Lowe’s Monetary Policy Decision, which left Australia’s cash rate at its record low 0.1% [my emphasis]: At its meeting today, the Board decided to maintain the cash rate target at 10 basis points and the interest rate on Exchange Settlement balances at zero per cent. Inflation has increased sharply in
In the wake of Tuesday’s federal budget, Westpac chief economist Bill Evans has hosed down the futures market’s latest prediction that the Reserve Bank of Australia will hike the cash rate to 3.5% by 2024: The near term spending numbers in the Budget are certainly not sufficiently alarming to trigger a change in that approach