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.

8

OECD slays Budget, RBA growth outlooks

Via the OECD today: Trade conflict, weak business investment and persistent political uncertainty are weighing on the world economy and raising the risk of long-term stagnation, according to the OECD’s latest Economic Outlook. World GDP growth is expected to be 2.9% this year – its lowest annual rate since the financial crisis – and remain at

9

Uber-dovish RBA minutes sink Australian dollar

Via the suddenly sane RBA: 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, Wendy Craik AM, Ian Harper, Steven Kennedy PSM, Allan Moss AO, Carol Schwartz AO, Catherine Tanna Others Present Luci Ellis (Assistant Governor, Economic), Christopher Kent (Assistant Governor, Financial Markets), Carl Schwartz (Deputy Head, Economic Analysis Department) Anthony Dickman (Secretary), Ellis Connolly (Deputy Secretary), Alexandra Heath

12

Gotti demands MMT for ‘OK Boomer’

This is the right idea but for the wrong folks, at The Australian: One of the most important statistics calculated by Foreseechange is its “willingness to spend” data. This shows that retirees are the most willing to spend, followed by people in full time work without mortgage repayments. Retirees been savaged by lower interest rates

6

ASIC hoses Costello push for mortgage fraud

Peter Costello covered himself in glory again this week: Former federal treasurer Peter Costello says Australia’s monetary policy has probably run its course and believes some changes to responsible lending laws would stimulate the economy. Mr Costello said there was “a lot of intervention” following the Hayne royal commission earlier this year, which may have

11

Where did the rate and tax cuts go? Debt

Recessionberg is looking for tax cuts. Via Domain: The Morrison government is looking at ways to deliver tax relief to middle income earners as a much-needed boost to the economy after the nation suffered its biggest one-month fall in jobs in more than three years. Treasurer Josh Frydenberg said the government was “always looking” at

1

Nomura: Bond puke over

Via Zero Hedge comes CTA wizard Charlie McElligott of Nomura: Nomura’s Charlie McElligott who echoed what we said on Saturday, writing that “the Treasury selloff feels “tactically tired,” with positioning now well-cleansed (massive duration sale from leveraged funds in the last reporting period, plus short-term CTA model now-having established their “short” TY and ED$ positions

4

How high will yields correct?

Via JPM: There is still extreme crowding in defensive styles and momentum that we illustrated in our previous reports. An additional illustration is shown in Figure 1 below. It shows two strategies that in theory should have little to do with each other: one is equity long-short selection of winning/momentum stocks (momentum factor) and the

22

Bill Evans: RBA still to cut, with QE to follow

Via Bill Evans at Westpac: The Reserve Bank has released its quarterly Statement on Monetary Policy (SMP). The two key areas of most interest in the Statement are around further policy insights and the RBA’s growth, unemployment and inflation outlook. The discussion on policy was particularly interesting. The Overview for the Statement, which we expect

2

RBA embraces lowflation

From the new SoMP: The outlook for the Australian economy is little changed since the August Statement. GDP growth over the first half of 2019 was stronger than it was over the second half of last year and recent data have been consistent with a continuation of moderate growth. The labour market and inflation forecasts are

15

Grenville smashes Joye

Via monetary curdudgeon Stephen Grenville: Australian proponents of QE have noted that bond-purchases might not have much impact here, as long-end borrowing is mainly confined to the public sector. Never despair, they say: the RBA should buy shorter-term bank debt and mortgage-backed securities (MBS), or make loans to banks earmarked for on-lending, especially for housing…This

9

CS: Bond blood bath ahead

Via the excellent Damien Boey at Credit Suisse: Value rotation continued in earnest overnight, with sector-neutral value factors adding 0.7%, while momentum factors detracted 1.9%, and low-beta factors lost 0.5%. The value index is back to its mid-April highs, while the momentum index is now materially down year-to-date, having experienced stellar performance through the middle

2

RBNZ tears APRA a new one

Via Ian Rogers at Banking Day: The Reserve Bank of New Zealand is the agenda-setter in Australian banking, the central bank preparing for a great industry crisis in Australia and fearful it will unfold soon. Australia is chronically overdue for a banking crisis (although APRA never says) and the industry is woefully under-provisioned and under-capitalised

10

Gundlach: Crash, MMT coming

MARTIN LÜSCHER does a useful Q&A with Jeff Gundlach at Finanz and Wirtschaft: Central banks are easing, and stocks have reached a record high. But that doesn’t mean that everything is okay. Jeffrey Gundlach sees big trouble ahead. The CEO of the investment firm DoubleLine is worried about the development of corporate debt. But also the

3

Shadow RBA spooked by inflation pimple

Perhaps the least credible insitution in Australia says the RBA should hold today: Rates Need to Stay Put After Inflation Inches Up Australia’s inflation rate, at 1.7% in the September quarter, edged slightly closer to the Reserve Bank of Australia’s official target range of 2-3%. The unemployment rate dipped to 5.2% in September, while real

69

Recessionberg has crashed the economy

L-plate treasurer, Josh Recessionberg, has done the near impossible and crashed the miracle economy. When he assumed the role of Treasuerer, Recessionberg made a critical misjudgement that if he follwed the Costello recipe of running surpluses, cutting taxes and stuffing in migrants then he’d force the RBA to ease, and rising house prices would boost

20

Joye: RBA QE to buy RMBS

From Chris Joye today: After three years of inertia, a new intellectual paradigm has emerged from within the Reserve Bank of Australia. It has gradually taken form in speech after speech from the governor, Phil Lowe, and his acolytes. And its increasingly lucid logic rubbishes the concerns of critics worried about the consequences of extremely

2

Why bonds are still bid

Via the excellent Damian Boey at Credit Suisse: As expected, the Fed cut is policy rate range overnight by 25bps to 1.5-1.75%. The accompanying meeting statement, and commentary from Chair Powell were not dovish, and arguably even slightly hawkish: Officials removed the sentence saying “that the Fed will act as appropriate to sustain the expansion”,

4

Phil Lowe embraces lowflation

Via the RBA’s Phil Lowe: Thank you for the invitation to deliver this year’s Sir Leslie Melville lecture. When Ian Macfarlane delivered the inaugural lecture in this series in 2002, he said: ‘any objective assessment of achievements would place Sir Leslie among the most distinguished Australians of the past century’. It is a great privilege for

25

Dr Doom hoses MMT

Via Nouriel Roubini: With the global economy experiencing a synchronized slowdown, any number of tail risks could bring on an outright recession. When that happens, policymakers will almost certainly pursue some form of central-bank-financed stimulus, regardless of whether the situation calls for it. A cloud of gloom hovered over the International Monetary Fund’s annual meeting