From our Chris today: When the RBA slashed its cash rate from 4.75 per cent to 1.5 per cent between 2011 and 2016, it repeatedly argued that this would not trigger a re-leveraging of household balance-sheets and/or a new double-digit house price boom, which is exactly what happened. …Most embarrassingly for the RBA, two of
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.
From Phil Lowe yesterday: “It is reasonable to expect an extended period of low interest rates. On current projections, it will be some time before inflation is comfortably back within the 2-3 per cent target range,” Mr Lowe said. “It is highly unlikely that we will be contemplating higher interest rates until we are confident
One can always rely on the AFR to save the reputation of an oligarch. Within its mythos, those that handle money on a grand scale are Nietzschean ubermen, a preposterous notion that trashes accountability in our political economy. Chief Loon of the Reserve Bank of Australia, Phil Lowe, gets the airbrushing today from Pamela Williams:
From the Q&A yesterday with Phil Lowe: “There has been a significant tightening in lending standards. In some respects, it seems some institutions have become excessively risk averse. Many people in the community feel they have already borrowed too much and now they are in a period of consolidating the balance sheet rather than going
Via Governor Phil Lowe this afternoon: Inflation Targeting and Economic Welfare It is a great pleasure to address the Anika Foundation lunch for the third time. I would like to start by winding the clock back, not by three years, but instead by 40 years. It was 40 years ago that I started studying economics in high
It’s back. Right across the curve the Aussie bond rocket is half a bee’s appendage from record low yields: The curve trending towards deeper inversion at the short end no steepening of significance at the long: The spread to the US is widening with the long end back to records: Breakout appears imminent so long
Via Banking Day: Gone! Cornered by the aftermath of a great global recession, the 23-year fad of inflation targeting looks to be well and truly done in Australia. The Australian‘s and the Financial Review‘s previews this morning are in unison on the essence of the reform to be unveiled in a few hours, with RBA governor
While the RBA is still behind the curve on a sliding Australian economy and APRA is drowning in corruption scandals, the superb RBNZ is once again proving itself an intellectual leader, via Bloomie: New Zealand’s central bank is taking another look at its strategy for unconventional monetary policy as its official cash rate looks set to
Via Bill Evans at Westpac: We are bringing forward the timing of our forecast for the next cut in the overnight cash rate by the RBA from November to October. By October, we expect that the path of the unemployment rate will be sufficiently contrary to the RBA’s plans that they will have appropriate justification
Dearly, deary me. APRA is in the fight of its life yet its executive is already dead. At the AFR: Investors are threatening to vote against bonuses calculated under the prudential regulator’s new executive pay rules, putting them on a collision course with the boards of the major banks. Former National Australia Bank chairman Michael
From the Kouk: The Reserve Bank of Australia needs to be congratulated for publishing research which implicitly confirms that it made a mistake when setting monetary policy in the period mid-2017 to early 2019. Not that the research explicitly says that, but the RBA Discussion Paper, Cost-benefit Analysis of Leaning Against the Wind, written by
Deary, deary me. They’ve all lived such lives of entitlement that really don’t know anything about public service at all. It’s all about drawing a preposterously large salary, which undermines the culture of public service in the first place, and then protecting it ahead of the public interest. To wit, the AFR’s conservative attack dog,
Time to go, mate. Via the SMH: A rare public intervention from banking royal commissioner Kenneth Hayne could be aimed at ensuring his recommendations are not watered down by financial sector lobbying, former watchdog Allan Fels says. …In a move that adds to pressure on APRA, on Monday commissioner Hayne made his first public comments
Via Assistant Governor of Financial Market madness at the Lunatic RBA today: The Committed Liquidity Facility I’d like to thank Bloomberg for the opportunity to speak to you about the committed liquidity facility (CLF). The CLF has been in place now for almost five years. As we announced in June, after a careful review, the
It had better be. The last time Australia found itself coming out of a housing correction in 2011, MB warned that APRA should tighten macroprudential policy. Instead it waited five years and the rest is bubble history. In part APRA was slowed by the Lunatic RBA which very unwisely campaigned against macroprudential for years. This
Wayne Byers must resign, at the AFR today: Kenneth Hayne, who spearheaded the royal commission into the financial services sector, has come out and publicly backed all the recommendations in the APRA capability review and says it is consistent with his own final report. …Hayne’s endorsement of the capability review into APRA, which was released
Contemporary Australian governance is all about diffused responsibility. Rule one in this new public disorder is to pretend to reform by instructing the demonstrably failed to do it right. It’s virtue signalling writ large that changes nothing while protecting your arse. To wit. Josh Recessionberg, who stupidly reappointed APRA chairman Wayne Byers before he got
Via Domain: Billions of dollars of congestion-easing infrastructure projects that could boost the economy and increase safety are stuck years down the track as the Reserve Bank of Australia calls on the Morrison government to do more. As Prime Minister Scott Morrison promises to pull forward some infrastructure projects, an analysis of the federal budget
Via Westpac: An expected soft update but a robust trend in participation is making it very hard to see unemployment getting below 5% any time soon, let alone getting down the RBA’s natural rate of 4.5%. Westpac is forecasting the unemployment rate to rise from here. The June Labour Force Survey reported a 500 gain
Chanticleer is expressing public doubts as besieged APRA chairman Wayne Byers couldn’t even front cameras yesterday, preferring a teleconference from his fortress of solitude: This tight control of the dissemination of information and the strategic decision to avoid the nightly news sits oddly with the firm advice in the capability review for APRA to engage
Via Capital Economics chief economist Marcel Thieliant: Mr Thielant’s central scenario is that cutting interest rates to 0.5 per cent will be sufficient to restore growth and eventually return underlying inflation to the RBA’s target but if more stimulus were required, he says he is concerned that the government would probably remain reluctant to loosen
At the AFR come stunning leaks from APRA staff via its internal review: “When institutions are consistently able to get a different result by appealing to GM levels and above, line supervisors become demoralised and institutions become emboldened to push the limits,” one employee said. …One employee speaking under the protection of anonymity said the
Interesting from RBA foghorn Terry Mccrann today: Any suggestion that Reserve Bank governor Philip Lowe compromised his or the RBA’s independence with his ‘meet and quote’ with Treasurer Josh Frydenberg last week is just silly and quite simply doesn’t square with the facts. Very obviously, Lowe hasn’t needed to be bullied by a politician into
Obviously enough. Via the ABC: An independent review is urging the overhaul of the Australian Prudential Regulation Authority (APRA), slamming it for a poor culture and variable leadership. In a proposed shake-up of the often secretive regulator, a three member panel chaired by former ACCC chairman Graeme Samuel said change was needed. “APRA appears to
Via UBS: Implications: UBS still -25bps by Nov; but risk of earlier “if needed” The RBA cut to 1.00% ahead of our long held dovish view. We still think their GDP forecasts will be downgraded again in their Aug SOMP, raising their UR profile (falling to 4¾%). Indeed, we still expect at least another 25bps
Via Bill Evans at Westpac: The minutes of the July monetary policy meeting of the Reserve Bank Board confirm that the Board is still open to further monetary easing, although as we had expected, prospects for a third consecutive easing in August have been dampened. The best way to assess the likelihood of a move
June rantings from the Lunatic: International Economic Conditions Members commenced their discussion by noting that growth in the global economy had remained moderate over preceding months. Global trade and manufacturing activity had slowed over the preceding year. Trade tensions had remained elevated, although no new measures had been introduced since the previous meeting. In China,
As we know, the superb RBNZ has fully integrated monetary and macroprudential policy tools, a creative leadership and national interest values. This enables 300 staff to conduct all of the functions that Australia’s combined monetary regulators fail to do with 1,400. It uses big and dumb rules to govern financial stability, the cash rate when
Weeoo, weeoo, weeoo. The Pascometer has redlined on the Lunatic RBA: The body language was not as excruciatingly embarrassing as when Royal Commissioner Kenneth Hayne was forced into a photo opportunity with the Treasurer, but the Reserve Bank Governor’s comments of “support” for the government weren’t far behind. What a painful two-hour meeting it must