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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Banks to pass on full rate cuts…April fool!

Straight from the horse’s mouth, via Chanticleer: …up in Hong Kong, as least one of the Big Four was making it very clear that full pass-through was unlikely; the bank was keen that investors particularly understood that deposit rates at zero gave it very little room to move. If we assume that somewhere between 10

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Lunatic RBA to follow RBNZ doves next week?

Says ANZ: We expect no change to RBA policy as the labour market remains strong. The tone will likely remain cautious, however, owing to risks associated with housing, credit conditions and labour market expectations. Risks remain balanced as strong unemployment data have been offset by the weaker 4Q GDP and soft leading indicators The government

15

UBS: “Calling the end of the household super leverage cycle”

Via UBS’s excellent George Theranou: Households are still leveraging. Even though household liabilities growth dropped to a >5-year low of 4.2% y/y, because nominal income growth collapsed even more to just 2.0% y/y, the household debt-to-liabilities ratio lifted to a record high of 199% in Q4- 18. However, mainly due to falling house prices, household

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How to fix a rogue RBA

Given they are the untouchable sacred cow of modern finance, how do you fix an “independent” central bank when it goes rogue? Today this is not some curious academic question but one of urgent national interest priority. For the past 36 months the Reserve Bank of Australia has trashed its mandate of keeping inflation within

0

Credit Suisse: Stay long bonds

Via the excellent Damien Boey at Credit Suisse: What a difference a few weeks make! We wrote on 19 March 2019 about the outlook for bonds. But in a very short space of time, bond yields globally have hit new cycle lows, while in Australia, they have hit new historical lows.   Our proprietary duration

8

Lunatic RBA throws another governor under deflation bus

It must running out of bodies to use as speed humps. Already pulped are Ian Harper, Phil Lowe, Christopher Kent and Michelle Bullock. This time poor old Luci Ellis is thrown under the deflation bus: What’s Up (and Down) With Households? Luci Ellis Assistant Governor (Economic) Address to Housing Industry Association March Industry Outlook Breakfast Sydney – 26 March

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McKibbin stokes Labor inflation panic

Via the AFR today comes Warwick McKibbin: “If you think about what the Reserve Bank thinks, they’re looking ahead one or two years,” he said. “You don’t want to be in the position of cutting interest rates when you might actually have to be raising interest rates”. “And if you look at what the Labor

5

Shane Oliver: Rate cuts won’t re-inflate housing bubble

Via Investor Daily: Anyone expecting an RBA rate cut to trigger a repeat of the six-year property boom we experienced from 2011 needs to think again, according to one of Australia’s leading forecasters. Speaking to Investor Daily, AMP Capital chief economist Shane Oliver said he believes Sydney is now about halfway through its correction, with top-to-bottom

13

Aussie bond boom goes nuclear

Don’t say we didn’t warn you! Following the Dovish Fed last night, the Aussie bond boom is now shooting out of the atmosphere: Next stop record low yields across the curve as the RBA is forced to cut by runaway markets. Despite the boom, there has been no curve steepening at all, again illustrating how

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Is the RBA preparing quantitative easing?

From a reader today who notes the following on RBA minutes: “Members had a detailed discussion of the Bank’s operations in repurchase and foreign exchange swap markets and their role in achieving the Board’s target for the cash rate.” Up until yesterday, when quizzed on this RBA, has been reluctant to intervene to reduce these

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RBA guides CFR towards house price crash

The RBA is at it again at the Council of Financial Regulators which met yesterday: At its meeting on 15 March 2019, the Council of Financial Regulators (the Council) discussed systemic risks facing the Australian financial system, regulatory issues and developments relevant to its members. The main topics discussed included the following: Financing conditions and

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Kernel of lunacy: RBA stokes inflation panic

Yes, it’s inflation and, like some creature from the black lagoon, it is emerging from booming wages, via the AFR: Reserve Bank assistant governor Chris Kent says bond markets are underestimating the risk of wages growth stoking higher inflation, as long-term Australian bond rates fall towards historically low levels. …”What we have had here is

12

Westpac: RBA on track to cut

Via Bill Evans at Westpac: The Minutes of the March Reserve Bank Board meeting emphasise the Board’s uncertainty around the slowdown in output data while labour market data remains robust. In the final paragraph of the section on the policy outlook, the Board noted “they assessed that it would be appropriate to hold the cash

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UBS: Get ready for sub-1% RBA

Via the excellent George Tharenou at UBS: For the RBA outlook, given the limited policy firepower at a 1.5% cash rate, & our deep dive showing banks likely won’t pass on the full reduction, to make cuts more effective, the RBA should communicate a ‘dovish easing’, with a commitment to further ease if required to

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Westpac: Interest rate cuts are coming

Via Westpac: Westpac’s forecast for RBA rate cuts in 2019, set down on February 21, has gained significant support over the last week. Updates on business and consumer confidence show the growth slowdown over the second half of last year is carrying into 2019 and starting to affect decision making. The case for cuts may

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Jacob Greber kidnapped by aliens!

We are sorry to report that the AFR’s US correspondent has been kidnapped by aliens and felt the cold kiss of a rectal probe today: Australia’s treasurer hunkers on the top floor of his department’s Langton Crescent HQ in Canberra putting final touches on the government’s finances. …The reason? Inflation has reappeared, seemingly out of nowhere

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El-Erian nails MMT

Via Bloomie comes Mohamed A. El-Erian on MMT: The current window for the MMT debate has been opened by the protracted period of reliance on unconventional central bank policies that has followed the global financial crisis and the European debt crisis. Despite the initial concerns expressed by some economists, this period of ultra-low interest rates and ballooning