Over the weekend, the AFR‘s latest monetary policy tinkerer, John Kehoe, did a terrible feature on RBA reform: Former RBA senior economist Peter Jonson says rates are approaching “dangerously low” levels. “I could live with a couple of rate cuts, but I would hate to see four 25 basis point rates cuts as some are suggesting,”
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 The Shadow: Australia’s inflation rate, at 1.3% (March quarter), highlights concerns about insufficient aggregate demand. For 10 of the past 12 quarters the headline inflation rate has been less than 2%, well below the Reserve Bank of Australia’s official target range of 2-3%. The unemployment rate ticked up to 5.2% in April and yields
Via Bill Evans at Westpac: Last week Westpac moved forward its forecast for RBA cash rate cuts from the original forecast on February 21 of cuts in August and November to cuts in June; August and November. Therefore, Westpac is now forecasting three cuts in 2019 to push the cash rate from 1.5% to 0.75%
Via the AFR: The big four banks will face stronger competition from second-tier banks, which will be able to offer cheaper home loans and sharper deposit rates when the regulator moves to even the playing field for banks in the weeks ahead. The Australian Prudential Regulation Authority is expected to reduce the relatively high risk
Via Terry Mccrann, RBA foghorn, today: The absolutely basic thing to understand is that next week’s cut is the only cut the RBA has locked in. …Yes, it might broadly think it probably will deliver a second cut. Yes, it can analytically feel that it might end up delivering even more cuts. But right now, it’s 25
The pressure is on from the property adoring press: Experts expect the major banks to pass on most, if not all, of a one-quarter of a percentage point drop in the official cash rate to 1.25 per cent at Tuesday’s meeting, which financial markets estimate is an 86 per cent chance. “They should pass it through,” said
JP Morgan’s Sally Auld tracks MB into the all-in position of four rate cuts over the next year: “A number of developments in recent months suggest the RBA is unlikely to achieve desired macro-economic outcomes with only 50 basis points of easing. In the next year the RBA cash rate is likely to reach a
The RBA is very likely going to run out of cash rate easing options over the next year, with the final four cuts taking us to 50bps and the effective “zero bound” for the cash rate. So what will the RBA do next? It has already discussed quantitative easing without being specific. Given government bonds
Via Martin North: The Bank Bill Swap Rate continues to track down, which means that Banks are sitting on considerable funding advantage, which is being used to discount attractor mortgage rates. However, there is a strong case now for banks to reverse their out of cycle rate hikes imposed on borrowers over recent months, irrespective
Via Bill Evans at Westpac: Earlier this week Westpac moved forward its forecast for RBA cash rate cuts from the original forecast on February 21 of cuts in August and November to June and August. The June cut remains almost certain; a second in August is our expectation and the November cut should also proceed.
Domain probes the question today with Shane Oliver: “They just got it wrong,” he said. And the Kouk: “The emphasis has been on the unemployment rate but once you look at under-employment you see households are struggling,” he said. “Around the world, in the UK, the US, across the Tasman in New Zealand, these are
Over the past year there has an ongoing debate about Australia’s little financial crisis. It was the dramatic widening of bank-to-bank funding costs. Coats starting falling as the Hayne Royal Commission wound up. Westpac explained the spread compression then by observing an abundance of cash: Is the lack of a March “turn” a sign of things
Via the excellent George Theranou at UBS: With actual mortgage rates of ~4% + the new 2.5% buffer, the assessed borrowing rate is likely fall to ~6.5%, below the ~7¼% floor, ‘notionally’ increasing borrowing capacity by ~8%. If the RBA also cuts & mortgage rates decline to 3.5%, borrowing capacity rises ~14%. However, given the
Via the Governor: Thank you for the invitation to speak to the Economic Society of Australia. It is very good to be back here in Brisbane today. I would like to begin by providing an update on recent developments in the global and Australian economies. I will then discuss how our thinking on the appropriate
Via the RBA: International Economic Conditions Members commenced their discussion of the international economy by observing that global growth had eased in the second half of 2018 and looked to have continued at around this more moderate rate in 2019. Growth in Australia’s major trading partners was also expected to continue at around this slower
Via Damien Boey at Credit Suisse: Against the odds, the LNP has won the Australian Federal election. In his victory speech, Prime Minister Morrison said that he had always believed in miracles. He described the election victory as a miracle – but over and above the first miracle he had already experienced in the form
The short answer is no. The long answer is yes. The RBA will still need to cut twice in H2 this year. If it doesn’t then property prices will keep falling and the economy keep stalling out. All leading indicators for employment have now crashed and the jobless rate will climb through H2 regardless of
Via NAB’s Alan Oster: [The] “risk that the RBA delivers additional policy stimulus by early 2020, either by cutting again or opting for an alternative policy measure.” “Yesterday’s labour force data provided further evidence that the economy is weaker than the RBA had expected.” “Although employment has remained strong, other measures point to increased spare
Via Damien Boey at Credit Suisse: The slowing in growth of aggregate hours worked is very consistent with what leading indicators have been telling us for some time. Our proprietary labour market leading indicator has historically been a reliable predictor of trend growth in hours worked since 2000 (please see our recent article for details). It is