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.

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That’s a lot of QE

Via Deutsche: By almost any metric Central bank balance sheet expansion in the last few weeks has already exceeded anything seen in the 2008/9 crisis period. In the last six weeks alone, G10 Central banks have expanded their collective balance sheet by $2.7 trillion, and 2/3rds of this comes from the Fed. The Fed has

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RBNZ scraps LVR

Via RBNZ: The Reserve Bank is proposing the removal of mortgage loan-to-value ratio (LVR) restrictions in line with the Bank’s financial stability mandate. The proposal is in response to the economic downturn caused by the COVID-19 pandemic. The LVR requirements are one of the macro-prudential tools that the Reserve Bank has available to respond to

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UBS cuts major bank dividends to zero

Via the excellent Jonathon Mott at UBS: ADIs expected to “seriously consider” deferring decisions on dividends Following recent announcements suspending bank dividends by several global regulators, APRA stated that it expects all ADIs (Authorised Deposit Taking Institutions) and insurers to “limit discretionary capital distributions in the months ahead” and instead use these capital buffers to

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CBA rewards low risk, punishes high risk mortgages

Via Banking Day: Canstar reports that CBA has cut the basic variable rate by 18 basis points for owner occupiers paying either principal and interest or interest only and with loan-to-valuation ratios below 70 per cent. The new rate is 2.79 per cent. For owner occupiers paying either P&I or interest only and with an

5

S&P slaps Australia on downgrade watch

Zero surprise here. S&P is the only one of the three rating agencies that have much of a clue about Aussie sovereign credit: Australia Outlook Revised To Negative As COVID-19 Outbreak Weakens Fiscal Outcomes; ‘AAA/A-1+’ Ratings Affirmed Rating Action On April 8, 2020, S&P Global Ratings revised the outlook on its long-term ratings on Australia to negative

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Fitch downgrades major Aussie banks

Via Fitch: Fitch Ratings-Sydney-07 April 2020: Fitch Ratings’ downgrade of the Issuer Default Ratings (IDRs) of Australia’s four largest banking groups and their New Zealand subsidiaries to ‘A+’/’F1’ from ‘AA-‘/’F1+’ reflects the agency’s expectations of a significant economic shock in 1H20 due to measures taken halt the spread of the coronavirus, followed by a moderate

5

BOQ in deep with tourism bust

Banking Day reports on COVID-19 tremors shaking BOQ: What looked to George Frazis a month ago as a core strength of the Bank of Queensland could soon be revealed as a powder-keg on the company’s balance sheet. During a strategy presentation in February, the new BoQ chief identified the bank’s fast-growing business lending operation as

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And here comes the credit crunch

As predictable as the dawn, via Domain: Lenders are revising their lending criteria, with a focus on borrowers considered to be in high-risk industries. “Generally where a customer is in a severely affected industry such as tourism, hospitality or retail, then their loan is declined unless we can prove that their income is unaffected,” says

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Shadow banks pull mortgages, deposit run favours majors

Via Banking Day: The relationship between brokers and lenders is being tested, after repeated moves by several non-bank providers to withdraw loan approvals from home buyers. Mortgage brokers say lenders are even marooning pre-approved borrowers after they make home purchases, forcing them to make last-minute dashes to other credit providers to ensure clients meet settlement

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Credit freeze continues

With a little thaw. Investment grade spreads have fallen after the central bank tsunami: So have junk spreads but they remain wide: CFR sees big defaults coming: Acknowledging the enormous threat to jobs and incomes posed by the coronavirus epidemic, the Federal Reserve on March 23 pledged to use “its full range of authorities to provide powerful

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Minutes of the RBA’s very good say

Great stuff from Captain Phil and the crew. Ignore the cast of parasites which only get in the way and should be disbanded. Minutes of the Monetary Policy Meeting of the Reserve Bank Board Members Present Philip Lowe (Governor and Chair), Guy Debelle (Deputy Governor), Mark Barnaba AM (by video), Wendy Craik AM (by video), Ian Harper (by video), Steven Kennedy PSM, Allan Moss AO, Carol Schwartz AO

2

Aussie bond boom returns

The RBA’s panic-busting QE is doing a great job of restoring order. Bonds have been bid almost without cease since the great dislocation: I expect spreads to come in further yet. The curve is still far too steep for the massive deflation and growth bust that is at hand: The 10 year at 50bps and

1

Illiquid bond funds try it on at the RBA

Via the AFR: London-based James Aitken of Aitken Advisors says few central banks “had put in as much effort into understanding the plumbing of their own, not to mention the global financial system, as the RBA”. …”Under enormous pressure, their communications and guidance have been consistent and concise. Australians should be proud of the ongoing

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APRA suspends mortgage arrears

Via APRA comes the end of mortgage arrears: The Australian Prudential Regulation Authority (APRA) today confirmed its regulatory approach to the COVID-19 support packages being offered by banks and other lenders to their borrowers in the current environment. Many banks have recently announced COVID-19 support packages that provide affected borrowers with an option to defer

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The RBA’s excellent day

From Captain Phil: Good afternoon. The Reserve Bank Board met yesterday and decided on a comprehensive package to help support jobs, incomes and businesses as the Australian economy deals with the coronavirus. I would like to use this opportunity to explain this package and to answer your questions. We are clearly living in extraordinary and

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RBA cuts, launches QE into carnage

From the RBA just now: The coronavirus is first and foremost a public health issue, but it is also having a very major impact on the economy and the financial system. As the virus has spread, countries have restricted the movement of people across borders and have implemented social distancing measures, including restricting movements within

2

ECB soothes with billions more

Via the ECB: ECB announces €750 billion Pandemic Emergency Purchase Programme (PEPP) 18 March 2020 The Governing Council decided the following: (1) To launch a new temporary asset purchase programme of private and public sector securities to counter the serious risks to the monetary policy transmission mechanism and the outlook for the euro area posed

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RBA leaks QE

Via the AFR, this sure sounds like a leak: The Reserve Bank will cut the cash rate to a record low of 0.25 per cent and target four-year government bonds in the country’s first major quantitative easing package worth a speculated $50 billion, all designed to contain a blowout in borrowing costs for corporates and

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Today, the fate of civilisation hangs on Phil Lowe. No pressure

Today Phil Lowe faces the most important moment of his career, the gravest moment in his central bank’s history and, to put it bluntly, the most far-reaching moment for the contemporary financial system, as well as the liberal capitalism that it represents, that any Australian central banker will ever face. I am not kidding. Today