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.

15

Treasury confirms macroprudential preferred to control house prices

Via Treasury Secretary John Fraser in the Parliament today: Housing market and dwelling investment The housing market is another sector which we will be monitoring closely. In recent times, Australia has experienced one of the largest booms in housing construction since Federation, supported by record low interest rates and strong population growth. Since June 2014,

5

Goldman: RBA to hike in Feb as wages surge

Via Bloomie: Woolies’ warehouse workers are preparing to walk off the job to demand higher wages and greater job security, in a sign that a strengthening labour market could be emboldening employees. …”This could be a canary in the coal mine,” said Andrew Boak, chief economist for Australia at Goldman Sachs. “When you sit back

17

KPMG: Australia can weather six rate hikes no worries

Here’s some bullhawk droppings: Predictions by one of Australia’s largest property developers that a 150 basis point rise in the broad-based mortgage market would effectively trigger a recession have been challenged by KPMG modelling that says such a rise would only shave part of GDP. Frasers chief executive Rod Fehring said last week the sensitivity of interest rates would have

5

APRA warns small banks to back off macroprudential changes

From Wayne Byers, APRA chairman, today: Housing lending standards Before I conclude today, I want to take a short detour to the subject of residential mortgage lending standards. Earlier this year, we announced further measures to reinforce prudent standards across the industry. We did this because, in our view, risks and practices were still not

6

Is Canada the RBA’s leading indicator?

As we know, Canadian house prices are rolling over or falling: Same in Australia: Authorities in both countries are making exactly the same sounds about household debt risks. On Friday, the head of the CHFC, Evan Siddall, sounded straight up like Phil Lowe: “We do have a debt problem. The more house price-financed debt you have,

6

Bill Evans: There ain’t no inflation

Our Bill on next week’s CPI: The key economic event next week will be the release of the September quarter Consumer Price Index. Westpac’s forecasts are: 0.74% for headline; 0.27% for Trimmed Mean; and 0.32% for weighted median. The jump in the headline is largely driven by sharply rising electricity prices. They are expected to

10

Zero urgency in RBA minutes

RBA minutes: Domestic Economic Conditions Members commenced their discussion by noting that the Australian economy had grown by 0.8 per cent in the June quarter, in line with the Bank’s forecast. Growth in consumption and the contribution from net exports had been higher than in the March quarter, partly reflecting the unwinding of temporary factors. Members noted

2

Joye rides a bond bull

From Chris Joye today: One of the most vocal local bulls is the barrel-chested Charlie Jamieson from the eponymous Jamieson Coote Bonds, which after launching in 2014 now runs $455 million. (I played in the same rugby team as his lofty co-founder, Angus Coote, who was a handy second-rower serviced by an extraordinarily capable hooker.)

14

Mr Rainbow: Hike into lowflation

From former RBA boffin John Edwards today: It’s been tough for those writing the IMF’s World Economic Outlook in recent years. ‘Is the Tide Rising?’, the report asked in 2014, only to conclude later that same year that ‘Legacies, Clouds and Uncertainties’ still surrounded the global outlook. The next year there were ‘Cross Currents’, and then ‘Uneven

12

2018 rate cut odds rise

Via Barclays: We expect the RBA to remain patient and wait for signs of a more broad-based recovery across businesses and household incomes before firmly signalling any change in monetary policy stance Governor Lowe clearly stated in his parliamentary testimony that, within the RBA, the preference is for rates to move up, not down, from

9

Shadow RBA turns hawkish

From the Shadow: Official economic growth figures for the second quarter found the Australian economy grew by 0.8 per cent in the three months to June, and 1.8 per cent for the year, rebounding from 0.3 per cent for the first quarter of 2017. Combined with favourable employment figures and an improved outlook for the

6

Lord of the Bullhawks returns

Chris Joye, inflation hawk, soars again: The world’s most important central bank is on track for three rate hikes this year, and has started the unprecedented process of unwinding its asset purchasing program – or tapering “quantitative easing” – which is having a devastating impact on interest rate sensitive sectors. While duration-loving financial markets and

2

Another obvious reason to doubt Australian bullhawks

Via Deutsche: Australian consumers suggest the RBA won’t be following the BoC anytime soon; and that Fed Funds should be closer to the RBA cash rate. One stark difference between Australia and Canada is the ‘happiness’ of Canadians (the high level of Canadian consumer sentiment) versus ‘not-so-happy’ Australians (Figure 1). In Figure 2 we plot

16

RBA minutes hit Goldilocks tone

RBA minutes: Domestic Economic Conditions Members commenced their discussion of the domestic economy by noting that labour market conditions had continued to improve, although spare capacity remains. Employment had risen further in July, the participation rate had edged higher and the unemployment rate had remained steady at 5.6 per cent. Full-time employment had risen strongly

9

Bloxo goes all-in on rate hikes

From Bloxo: Strong jobs growth: RBA hikes are coming Today’s jobs numbers delivered a strong upside surprise, with 54k jobs created in August (market had 20k) driven mostly by full-time job creation. These numbers line up well with the other surveys, such as the NAB business survey, job vacancies and job advertisements, which are also