Australian interest 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.

69

Recessionberg has crashed the economy

L-plate treasurer, Josh Recessionberg, has done the near impossible and crashed the miracle economy. When he assumed the role of Treasuerer, Recessionberg made a critical misjudgement that if he follwed the Costello recipe of running surpluses, cutting taxes and stuffing in migrants then he’d force the RBA to ease, and rising house prices would boost

20

Joye: RBA QE to buy RMBS

From Chris Joye today: After three years of inertia, a new intellectual paradigm has emerged from within the Reserve Bank of Australia. It has gradually taken form in speech after speech from the governor, Phil Lowe, and his acolytes. And its increasingly lucid logic rubbishes the concerns of critics worried about the consequences of extremely

2

Why bonds are still bid

Via the excellent Damian Boey at Credit Suisse: As expected, the Fed cut is policy rate range overnight by 25bps to 1.5-1.75%. The accompanying meeting statement, and commentary from Chair Powell were not dovish, and arguably even slightly hawkish: Officials removed the sentence saying “that the Fed will act as appropriate to sustain the expansion”,

4

Phil Lowe embraces lowflation

Via the RBA’s Phil Lowe: Thank you for the invitation to deliver this year’s Sir Leslie Melville lecture. When Ian Macfarlane delivered the inaugural lecture in this series in 2002, he said: ‘any objective assessment of achievements would place Sir Leslie among the most distinguished Australians of the past century’. It is a great privilege for

25

Dr Doom hoses MMT

Via Nouriel Roubini: With the global economy experiencing a synchronized slowdown, any number of tail risks could bring on an outright recession. When that happens, policymakers will almost certainly pursue some form of central-bank-financed stimulus, regardless of whether the situation calls for it. A cloud of gloom hovered over the International Monetary Fund’s annual meeting

20

QE should target the Australian dollar not mortgages

Via Banking Day: Australian banks “face greater pressure to their profits” a Treasury briefing for their minister, Josh Frydenberg, explains. Or at least they will be under even stiffer pressure if and when quantitative easing unfolds in Australia. Some dare to guess this may be as soon next week. In any event, QE with dinkum

40

Bill Evans on the RBA’s QE options

Via Westpac’s Bill Evans: In last week’s note we opined that the Effective Lower Bound (ELB) for the RBA’s cash rate is 0.5% which we expected to be reached in February next year. After that point we argued that the RBA would assess that the benefits to the currency and household cash flows from further

22

APRA watching, watching as property hysterics build

Bloomie is borderline hysterical today: Australia is seemingly rushing headlong into another debt-fueled property binge. Three interest rate cuts that have taken mortgage rates to a record low and a loosening of lending curbs have sent buyers flocking back to the housing market. At current boom-time rates of growth, Sydney home prices could recoup two

1

Quant quake 2.0?

Via the excellent Damien Boey at Credit Suisse: The “quant quake” is happening again. Overnight, and indeed, over the past week, we have seen a very sharp rotation into value factors and out of momentum factors. This follows on from the sharp rotation we saw from late August to early September. To be sure, there

0

More CPI previews

UBS was dovish. Damien Boey at Credit Suisse is hawkish: Ahead of next week’s much anticipated CPI release, we thought it would be interesting to see what the RBA’s core inflation models are saying right now. As background, the RBA models core inflation using the following variables: The size of the output gap. Unit labour

16

Westpac: Aussie QE odds-on in 2020

Via Bill Evans: The employment report for September printed a modest fall in the unemployment rate from 5.26% to 5.20%. Further, the underemployment rate fell from 8.53% to 8.35%. That will be sufficient to avert another rate cut from the RBA in November. Westpac has consistently argued that a cut in November was unlikely and

64

Bugger the surplus. Households hate life without RBA insurance

MB often works with international hedge funds on the Aussie economy. I recall the reaction of one from the US when he discovered that, unlike US fixed rate mortgages, Australian mortgages are all floating rate. He declared immediately: “Households must all pray for the next recession!” Why? Because that meant cheaper repayments for the overwhelming

3

Foghorn: No RBA cut coming in November

Via RBA foghorn, Terry Mccrann: It will leave its official interest rate unchanged at its regular and decidedly idiosyncratic Cup Day meeting. Leaving the rate unchanged was already the most likely outcome of the meeting before Thursday’s monthly jobs data; the continuing good news on jobs made it a slam dunk. …The next rate cut,

26

RBA outlines “sizeable” construction crash

Yeh, they’re onto it at last. Deputy Governor Guy Debelle today: The housing market has a pervasive impact on the Australian economy. It is the popular topic of any number of conversations around barbeques and dinner tables. It generates reams of newspaper stories and reality TV shows. You could be forgiven for thinking that the

20

CS: RBA has lost it

Via the excellent Damien Boey at Credit Suisse: Minutes from the RBA’s early October meeting were dovish. The Bank highlighted: Its easing bias. That rising house prices are not a constraint on policy easing right now. The low(er) exchange rate as an especially important channel for rate cuts to be transmitted to the broader economy.

0

Bonds BTFD?

Post trade non-deal, Aussie bonds have sold off with the move in the US especially violent, though Australia has followed: The Aussie curve has steepened: And, giving us read of just how locally based Aussie weakness is, spreads to the US have widened: So, is it BTFB? Westpac thinks so: Its an important week for

40

Bearish RBA finally gets it

The happy pills have soured at Martin Place: International Economic Conditions Members commenced their discussion of global economic conditions by noting that heightened policy uncertainty was affecting international trade and business investment. This had continued to be apparent in a range of indicators, including new export orders and investment intentions. Conditions in the manufacturing sector