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.
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
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
APRA’s monthly banking statistics have nothing but bad news for house price. Here are the year on year growth rates in investor mortgages in the big eight banks: ANZ CBA MQG NAB WBC BOQ BEN SUN Total Feb-19 -4.5 0.0 43.2 0.6 0.4 0.2 7.3 -1.3 0.4 Jan-19 -4.2 -0.1 44.4 0.7 0.9 0.8 7.0
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
Via Bill Evans at Westpac: In previous years the Reserve Bank has generally observed that fiscal policy has had only a very limited bearing on monetary policy decisions. It is reasonable to contemplate whether 2019 will be different. Firstly, if we take the expected approach from the Budget (an expansionary budget with a focus on
It led on macroprudential. It led on keeping all levers of monetary policy under one roof. It led on bank capital. And now it is leading on the basic arithmetic of doing your job. Voila, the RBNZ! The Official Cash Rate (OCR) remains at 1.75 percent. Given the weaker global economic outlook and reduced momentum
Via BS today comes the economics community cracking the code for where the Sun don’t shine: Australia’s economy slowed sharply in the second half of last year yet hiring, from a broad perspective, did not. It’s still running at a relatively brisk pace of over 270,000 per annum, or just over 2%. Many believe that merely
Magazine cover alert? Via The Australian: The arrival this week of an inverted yield curve on the bond market has been taken with all the gloom of a portent from Dr Doom: It may indicate a recession ahead but it also signals that bonds are back. In fact, high net worth investors have been betting
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
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
Sigh. My kingdom for a central bank that has a clue about how to defend its nation in a time of lowflation. Every time the lunatic RBA has opened its mouth for eight years it has lifted the AUD. Today’s preposterous optimism from Luci Ellis is no exception delivering another little deflationary slash in the death
It’s been running for a few years: the widening spread between the cash rate and bank funding costs expressed through BBSW. This has led to impaired monetary transmission for the RBA as banks are forced to wither hike rates out of cycle, or not cut when it does. Recent weeks have seen the spread compress
Via Westpac: • A quote from last week’s March RBA Board Meeting Minutes, has garnered significant attention over the past week., the RBA noted that: “… 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.” When
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
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
Warp Factor 9 now as the long end of the Aussie bond curve was absolutely plastered to all-time low yields on German recession fears. The short end is headed the same way: The curve is now inverted right out to the six year with the long end still flattening screaming ‘recession’ at a lunatic RBA:
Weeoo, weeoo, weeoo. When the Pasconometric redlines on your arse then you have either reached the very top or the very, very bottom. For the RBA it is the latter: It was perhaps inadvertent that the minutes of this month’s RBA board meeting showed our central bank was seriously out of touch with the economy. When it
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
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
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
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
Go you good thing. All new highs in the tearaway Aussie bond boom overnight: The curve has still failed to steepen at all. The short end inverted the most since the GFC with the three year below the cash rate: Spreads to the US hit all-new wides for the cycle: The fantastic thing is that
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
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
The RBA minutes are out: International Economic Conditions Members commenced their discussion of the global economy by noting that new information had been somewhat limited over the preceding month because of the government shutdown in the United States and the Lunar New Year holiday period across Asia. The global economy had grown above trend in
Via the always excellent Damien Boey at Credit Suisse: The RBA has been telling us for some time that rate cuts lack utility. Many have interpreted this to mean that there is a new floor on rates. But an equally valid, and opposite interpretation of the same phrase is that perhaps there is no floor
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
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
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
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
