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 RBA meets tomorrow amid some serious bond market and yield turbulence. This is new territory for the bank. It was only the last meeting that it “shocked” markets by extending its QE program. So, is it prepared to shock again?’ Via UBS: Higher bond yields now imply a very material RBA rate hike cycle
What next for bond and stock market crashes? Wall Street was mostly caught on the hop by the bond and stock crash so the wisdom of asking it at all is questionable. Let’s see what it has to say now. Goldman: This week’s move has put the velocity of the real yield selloff on par
We noted this week that mortgage applications are now so hot that banks are unable to keep up and approval times are blowing out spectacularly. House prices are on the march too. FOMO is loosed and there is no prospect of higher interest rates for years. So freshly listed Liberty Financial is enjoying an unexpected
What a business cycle this is. Juiced by virus amphetamines it is moving extraordinarily fast. Last year we had the crash down, the crash up, a depression, thumping stimulus and K-shaped recovery, a gold boom and bust on debasement, growth stock bubble and now bust plus value rotation, an alleged commodity super-cycle, and now, one
More interesting ruminations from a slightly less bullish Goldman Sachs on how to hedge inflation. My own view is that gold is not working as it used to. Real rates have been pummelled but that has triggered a rush to BTC instead. I reckon that given this inflation pulse will be strongest in the US
Markets are today busily repricing the prospects for interest rate rises around the world. This is being driven by the vaccine-led post-COVID recovery, ongoing monetary and fiscal stimulus and rising supply-side inflation associated with bottlenecks and runaway demand for goods while services are suppressed by lack of mobility. Yesterday TD Securities argued that the RBA
Via the FOMC: Despite a sharp spike in unemployment since March 2020, aggregate wage growth has accelerated. This acceleration has been almost entirely attributable to job losses among low-wage workers. Wage growth for those who remain employed has been flat. This pattern is not unique to COVID-19 but is more profound now than in previous
I noted earlier that the US inflation panic is likely to drive yields higher yet. For how high we turn first to BMO: The selloff in Treasuries appears to have stabilized overnight after 10-year yields reached as high as 1.331% and 30s touched 2.11%. These extremes were accompanied by an elevated volume profile with cash
From the always worthwhile George Tharenou at UBS: We expect the RBA to tweak its QE operations At their meeting in February, the RBA extended QE and told markets they will continue to buy $5bn/week of bonds until September. However, the Bank didn’t provide any further details on the composition of the buybacks (e.g. range
Fresh from the central bank: Christopher Kent, Assistant Governor (Financial Markets) Introduction Today I will discuss some recent developments in the foreign exchange market, and provide some views on the role of the Reserve Bank’s various policy measures. I will also briefly discuss a modest change to the way the Bank will be using foreign
DXY was firm last night: Australian dollar fell: EMFX too: Gold and oil are doing the opposite, which is quite unsual: Miners to the moon: Base metals likewise: EM stocks whooshka: It’s a sunny day in junk land: Treasuries to the knackery: And stocks no like with the miracle of a down Monday: The Treasury
Will the RBA upsize QE at ay time? This question was asked by Chris Joye on the weekend. It certainly could though I think it is unlikely. The RBA is too conservative for it. Joye channeled Dr Andrew Leigh again: QE has lowered yields by 0.3% and suppressed the Australian dollar: If QE works to
As we know, the world enjoyed an unprecedented K-shaped recovery last year as goods boomed via stimulus and work from home. But high tough services completely busted amid social distancing. Now, it is becoming plain that inflation trends are following exactly the same pattern. Via some great charts from The Daily Shot on the US
The RBA has never directly acknowledged a single asset bubble that I can recall. So it’s not going to start now. The regime of Phil Lowe did spend the better part of five years keeping monetary policy too tight worrying about bubbles but all that achieved was structural lowflation. It is no surprise, therefore, today,
Via Banking Day: Greater Bank has set a new benchmark in the mortgage market, cutting its one-year fixed rate by 20 basis points to 1.69 per cent. Comparison site Canstar says this is the lowest mortgage rate in the market. Other low-rate lenders in the Canstar database include UBank, which is offering 1.75 per cent
As real interest rates fall and fall, at first via central bank interest rate cuts then via rising inflation meeting central bank’s refusing to hike, cash gets less and less attractive. From UBS: Eurozone inflation jumped by the most in over a decade in January, rising from minus 0.3% in December to plus 0.9%. This
For many years Australia has dragged the chin on unconventional monetary policy. Back in 2012, MB campaigned for zero interest rates, QE and macroprudential tightening. This would have shifted the recovery from house prices to tradables, a much more healthy pattern of growth. The RBA was useless for many years on this question, always looking
With a short term inflation spike about to land on markets BofA takes a look at the critical bond yield levels that would upset stocks: No more TINA The long-standing bullish mantra for stocks has been “There is no alternative” or TINA. Especially for income investors, given that the S&P 500 dividend yield has been
Is QE blowing Australian bubbles? The question has dogged the FOMC for many years. Now, with Australian QE into its second iteration already, the panic is building. Is it justified? Chris Joye argues not: The Reserve Bank of Australia has launched an entirely necessary monetary policy regime that will involve sustained quantitative easing (QE) to
Via the good Captain today in Parliament: The RBA does not – and should not – target housing prices. Instead our focus is on the lending that is used to purchase housing. There are many moving parts here at present: record low interest rates; a shift in preferences towards houses and regional locations; large government
Risk is on but not for the Australian dollar which is retesting the lows again: There is only one reason for this today. The excellent work of the uber-dovish RBA, via RBC: RBA Governor Lowe spoke overnight, erring towards more rather than less (confirmation of a rolling 3y YCCtarget, further emphasis on the degree of
Via Capt’ Phil: Thank you for the invitation to address the National Press Club. This is the third time I have had the privilege of doing so, but it is the first time here in Canberra. The world has changed tremendously since my previous address in February last year: a pandemic, the biggest contraction in
The most dovish RBA ever by a country mile has tongues wagging. At Westpac: The Reserve Bank Board decided to extend the current bond purchase program by a further $100 billion. The purchases in the second tranche will begin in mid- April when the current program is set to be completed (that completion date could
A dove of immense proportions has perched upon Martin Place: At its meeting today, the Board decided to maintain the targets of 10 basis points for the cash rate and the yield on the 3-year Australian Government bond, as well as the parameters of the Term Funding Facility. It also decided to purchase an additional $100 billion
Here’s a measure of just how dovish Australia’s interest rate circumstances are right now. The perpetually hawkish Shadow RBA is also dovish: Signs of improvement but Shadow Board confident rates need to stay low Apart from some isolated hotspots, Australia’s policy of containing the coronavirus remains very successful, certainly by international comparison, and the economy
Via George Tharenou at UBS: The first RBA meeting of 2021 is going to be important The RBA Board is scheduled to hold its first meeting of the year on Tuesday (2 February). Given the RBA has been in ‘blackout’ since last year, and the data has been materially stronger than expected – markets and
Via Chris Joye at Coolabah Capital: While we are very bullish on Antipodean growth over the next 12 months, there is certainly a lot to be anxious about at present. We have a 50 per cent probability that China tries to take Taiwan in the next few years, triggering an immediate conflict with the US
Via APRA banking stats for December. Monthly investor mortgages from the Big 8 rose to their equal highest since the reopening at 0.2% on the month as all majors bar NAB accelerate into the segment: Led by Mad Macquarie: Annual growth is still down -1.8%: The monthly growth rate is still very low historically speaking
Via Bill Evans at Westpac: Markets are closely scrutinising the next moves from the RBA. It is important to recall that the key lesson of recent years for central banks and the likely current thinking of the RBA as expressed last year by the Deputy Governor is that it is better to err on the
Via Chris Joye: The challenge for monetary policy is that conventional tools are tapped out. The RBA’s main policy lever, the overnight cash rate, has hit its effective lower bound at 0.1 per cent. Two of its unconventional levers – the circa $200 billion Term Funding Facility (TFF) and the yield curve control policy that
