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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Credit Suisse: Why RBA must move to cut the cash rate

Again great stuff from Damien Boey at Credit Suisse who has a much better grasp of the economy than does the lunatic RBA: By now, CPI, unemployment and RBA forecast downgrades are becoming old news … The Consensus view is that the RBA will moderately downgrade its forecasts, but not capitulate on its rate stance

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UBS: Home sales volumes collapse, “very negative” for consumption

Via UBS: Home sales collapse to 21-yr low; very negative for renovations & consumption Home sales declined further, slumping to near the lowest level in 21 years. The pace of falls accelerated from a trend of -10% y/y, to around -16% now. The turnover rate (sales divided by stock) collapsed to a ~record low recently.

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Morgan Stanley: RBA to shift to easing bias

The oil tanker begins its turn, via Morgan Stanley: “We have removed rate hikes from our 2020 outlook, as our AlphaWise research points to fragilities in the household sector and a more prolonged consumer adjustment.” “Weakness in the housing/consumer sectors should continue through 2019,and we think further forecast downgrades from the RBA and the adoption

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Capital Economics: RBA falling behind housing “threat”

Via Capital Economics: The RBA will probably reduce its GDP growth forecasts but should still signal that the next move in rates will be up Our more pessimistic outlook for economic activity, the labour market and inflation suggest that the Bank may instead have to cut interest rates before long. We believe that the Bank

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ING hikes mortgage interest rates again

ING on the move, via Mozo: Online lender ING has become the latest bank to lift its variable home loan rates following an announcement earlier today. The lender will raise rates across all of its variable rate home loan products by 15 basis points, effective as of February 7, 2019. And according to Mozo Product Data Manager,

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Can a Brazilian disaster save the Aussie economy?

The terrible Brazilian mining tragedy that has iron ore prices running wild is something of a Black Swan event for Australia. Iron ore prices are volumes for the year ahead will now be higher than previously thought so we must ask if this changes the path for an economy clearly on the slide. Goldman’s assessment

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CPI in detail: Bullhawks be damned!

By Leith van Onselen The Australian Bureau of Statistics (ABS) has released the Consumer Price Index (CPI) data for the December quarter 0f 2018, which registered both soft headline and underlying inflation. According to the ABS, headline CPI rose by 0.5% in the December quarter, 0.1% above the September quarter’s 0.4%: However, on an annual

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Morgan Stanley: RBA lost, rates and AUD to fall

From Morgan Stanley today comes some sense at last, via ForexLive. On the NAB survey: decline was led by a noticeable reduction in profitability and trading conditions the lowest level for both since mid-2014 The weak business sentiment compounds the decline in confidence we have already observed on the household side On the RBA: RBA

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Wasted RBA graduates from crack to smack

The Reserve Bank of Australia will go down in history not only as the most corrupt central in the world but also the planet’s most stupid (or high). Let’s recall its record over this business cycle. Post-GFC it got it right, raising interest rates to increase bank profitability and suck in deposits to allow the financial

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RBA loon: Interest rates to rise

Via The Australian comes an escaped lunatic: The clearest indicators of ongoing momentum of Australia’s economy are strong employment growth and a rapid shift in the federal budget toward surpluses, said Ian Harper, a member of the Reserve Bank of Australia’s policy-setting board. …“The domestic economy, everything I’ve seen, shows that it is still strong,”

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Australian leading indicator plunges towards recession

Via Damien Boey at Credit Suisse: The NAB survey revealed a sharp decline in business conditions in December to a moderate +2 from +11. Confidence was unchanged, at +3. For us, capex intentions are the most significant component of the NAB conditions survey. Capex intentions dropped to +7 in December from +15. Firms still have

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NAB business survey collapses

Hoocoodanode? From NAB: Business conditions fell sharply in December, and while caution should be taken when interpreting data around the Christmas/New Year period, this outcome continues the downward trend in conditions over the second half of 2018. At face value, the fall over the past six months suggests a significant slowing in the momentum of

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Commodity prices are now irrelevant to the Aussie economy

Which is of course an absurd proposition. But it is true in a certain sense. Higher commodity prices are now irrelevant to the Aussie economy while lower are a danger. Why is this? The Australian economy is a basic two-step machine. First, it makes profits largely from international dirt sales. Second, it leverages that income via

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Credit Suisse: Prepare for another 0.5% of bank mortgage hikes

From Damien Boey at Credit Suisse Yesterday, NAB announced a 12bps increase on owner-occupier conventional mortgages, and a 16bps increase on interest-only investor mortgages. In the round of out-of-cycle rate hikes last year, NAB was the odd one out, choosing not to hike with its competitors. Therefore, today’s hike brings NAB more in line with

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NAB hikes mortgage rates

by Chris Becker Oh it’s been a fun day so far trading Aussie dollar! First the numberwang unemployment print, now the National Australia Bank (NAB) hiking interest rates out of cycle. Bang comes down the Australian dollar: From the horse’s mouth: NAB Chief Customer Officer – Consumer Banking, Mike Baird said the decision to increase

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Aussie household mortgage stress hits new all-time highs

Via Martin North: Digital Finance Analytics (DFA) has released the December 2018 mortgage stress and default analysis update. The latest RBA data on household debt to income to September fell a little to 188.6, but still remains highly elevated. The housing debt ratio continues to climb to a new record of 139.6, according to the

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A Tyrannosaurus sized egg is about to land on the RBA’s face

It couldn’t happen to a nicer central bank. The world’s most corrupt monetary manager is about to do a spectacular volte face with seventeen twists. After years of pretending that it understands the economy, that Australia’s outlook is relentlessly bullish, that it was a good idea to supplant a mining boom and bust with a

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Bonds, Australian bonds

For anyone paying attention, one of the H&H’s excellent calls a few months ago was to get long Australian bonds as the RBA’s fantasy of future growth ran into the nasty reality of a housing and China bust. To wit, today we see bond returns jumping: Damien Boey of Credit Suisse is another bond bull