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.
Of course he did. His only fiscal goal is force the RBA to cut as low as humanly possible, via the AFR: While the statement has been modified six times since 1996, with changes typically coinciding with either a change of government or the appointment of a new RBA governor, the triple mandate has remained.
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
Via Bloomie: Australia’s monetary policy easing has driven interest rates down to levels where they could be doing more harm than good for the economy. The central bank could be bumping up against the “reversal interest rate,” a level at which accommodative policy begins to produce unintended consequences. The clearest sign of that is the
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
Via Bill Evans of Westpac: The Reserve Bank Board meets on November 5 next week. There is little chance that the Board will decide to cut the cash rate at that meeting. Westpac confirms its forecast which was “refreshed” on July 24 that the Board would cut the rate by 25 basis points at the
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”,
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
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
From the McCrann foghorn: On Wednesday the latest official inflation figures will be released. In more ‘normal’ times they would immediately spark a frenzy of speculation over what the Reserve Bank would do to its official interest rate next Tuesday at its quirky Melbourne Cup day meeting. That won’t happen this year. As I told you a
This is one chart that gave him away in advance though we could have picked many others: The first six failed inflation forecasts were under Glenn Stevens’ RBA yet certain hedgies still listened to his inflationist drivel post-2016, via AFR: Twelve months after Glenn Stevens stepped down from a successful decade-long stint as Reserve Bank
Via Alan Kohler today: By how much? Well earlier this month, KPMG chief economist Brendan Rynne suggested between $77 and $83 a week, which would cost about $3 billion. Seems reasonable. Rynne’s argument was mostly about fairness, not fiscal stimulus: Newstart hasn’t increased in real terms since 1994 – if it had kept pace with
This time CBA: CPI Preview – Q3 2019 ■ We expect the headline CPI to rise by 0.5% in Q3 (1.7%/yr). ■ The Trimmed Mean CPI on our forecasts will print at 0.4% (1.6%/yr). ■ Inflation outcomes in line with our forecasts should see the RBA on hold in November. Overview The Q3 CPI figures
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
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
Via the excellent Jonathon Mott at UBS: Bank reporting season begins on 31st October. We expect another complex set of numbers given divestments, remediation charges and other “one-off” items in both this half and prior periods. However, we believe that 2H19E will be a high water mark for the sector as the outlook deteriorates in
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
Via BofAML: Three threats to bonds Typically, when stocks decline, we see investors rushing to buy US Treasury bonds and other safe assets. This tendency of bonds to rally when stocks drop – the negative correlation between bonds & equities – is the basis for a conventional allocation of 60% to stocks and 40% to
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
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
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
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
So say the excellent Damien Boey at Credit Suisse: RBA Deputy Governor Debelle has just delivered a “glass half-empty” speech about the housing construction cycle. Key points were as follows: 2020 shapes up as being the low year for residential construction, but the Bank can see through the trough to the other side. Long lead
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,
From Washington today comes Phil Lowe: “I don’t think it’s the right assumption to make that we’re going to have a lot more work to do to get inflation back to target and growth back to trend,” Dr Lowe told a forum at the IMF in Washington on Thursday (Friday AEDT). It’s possible, but I
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
Via Bill Evans at Westpac: There are two very important aspects to the minutes of the October meeting of the Reserve Bank Board. The first one relates to the conclusion to the minutes, “the Board would continue to monitor developments, including in the labour market, and was prepared to ease monetary policy further, if needed…” This language
They’re risky, have falling earnings, and are very highly valued at 15x forward. Yet Aussie banks are still bid. Why? A couple of Jonathon Mott charts from UBS tell the tale. It’s called the “dash for trash”: Divy cuts anyone?
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.
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
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
