Let me run you through some charts from the NAB business survey to make the point. Westpac does a nice job of drawing them up year over year. Headline indexes are back to 2013/14: Employment too: And forward orders: Capex is a bit better but not for long: All cyclical industries are folding: States are
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.
The headline numbers are poor for the NAB business survey: Most significantly, the employment index is now low enough for higher unemployment. NAB reckons -1 equates to about 14k jobs per month, not enough to soak up foreign entrants: Everything cyclical giving in on jobs: Conditions are deteriorating and so is confidence: Leading indicators are
Via Bill Evans at Westpac: The Reserve Bank’s May Statement on Monetary Policy (SMP) shows substantial reductions in the growth and inflation forecasts. GDP growth (to one decimal point) is now forecast at 2.6% for 2019 and 2.7% for 2020. That compares with 3.0% and 2.7% in the February Statement on Monetary Policy. The main
Chris Joye on Aussie QE: Because most of our borrowers pay “variable” as opposed to “fixed” rates of interest, the cost of borrowing in Australia prices off short-term (variable) rather than long-term (fixed) interest rate benchmarks. In the US during the crisis, the Federal Reserve bought long-dated government bonds to reduce the risk-free rate that
Via the SoMP: Domestic growth has been revised lower for 2019 Over 2018, Australian GDP growth was weaker than previously anticipated (Table 5.1). Some of the drivers of the slowdown in growth in the domestic economy over the second half of 2018, particularly mining activity, are expected to have been transitory. But other drivers, such as
Excerpted from Brett Gillespie at Ellerston Capital: For my regular readers, this month’s note is a little different. Briefer with one myopic focus. This month I am going to focus on Australia, and specifically the Reserve Bank of Australia (RBA). For the first time in over 2 years, we had a very “live” RBA meeting
Yes, this is what monetary policy has come to, via George Theranou at UBS: The RBA seems to be shifting from inflation targeting towards the labour market as the key policy driver. Their April minutes noted a scenario to cut “would likely be appropriate”…”where inflation did not move any higher and unemployment trended up”. Furthermore,
Via AFR: Former Reserve Bank of New Zealand governor and architect of its inflation target band Don Brash has cautiously come out in favour of Australia reviewing its inflation target due to persistently lower levels of inflation. “It makes sense to review it,” he told The Australian Financial Review. “But I have mixed feelings about how that
With trade tensions rising, Aussie bonds are too, especially the long end as the 15 year hits all-time highs: The short end is firmer and the curve is flattening again as the RBA’s economic fatwa lifts recession risks: Negative yield spreads are also a bit smaller thanks to you know who: No sign of an
Weeoo, weeoo, weeoo. Via The Pascometer: The RBA has been predicting higher wages growth ever since before it started weakening. Year after year after year, wages have been about to run higher, according to the RBA – but they haven’t. That the governor is reduced to a wan “some pick-up” might indicate how confidence in
Let’s invite a reverse takeover of the RBA by the RBNZ which just cut its cash rate to 1.5bps: The Official Cash Rate (OCR) has been reduced to 1.5 percent. The Monetary Policy Committee decided a lower OCR is necessary to support the outlook for employment and inflation consistent with its policy remit. Global economic
Via Bill Evans at Westpac: The Reserve Bank Board decided to leave the cash rate unchanged at 1.50%. This was Westpac’s forecast, although markets were uncertain, with around a 50% probability priced in for a rate cut and 14/26 market economists forecasting a cut (Bloomberg survey 3 May).There are two main reasons behind this decision.
Bravo Professor Ross Garnaut, published with permission from author: Productivity growth has been dismally low in the 21st century. PEFO says in the projection years it will return to an average of the 30 years that covers the stellar 1990s. Inflation has been stuck below the bottom of the Reserve Bank’s range for longer than
If you can be bothered, there’s oodles of amateurish commentary around on the RBA today. Nobody knows what it’s going to do next given it has left the reservation of its inflation targeting regime so I won’t try. What I will observe is that the internal ineptitude of the RBA that I’ve been pointing to
From the RBA just now: At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent. The outlook for the global economy remains reasonable, although the risks are tilted to the downside. Growth in international trade has declined and investment intentions have softened in a number of countries. In
It’s almost turned dovish: Shadow Board Sees Downside Risks to Australian Economy Increasing but Interest Rates Should Remain Steady Significantly, Australia’s inflation rate has fallen to 1.3% in the March quarter, putting it well below the Reserve Bank of Australia’s official target band of 2-3% and thus confirming economists’ concerns of a weakening economy. The
As markets adjust to new trade deal risk, Aussie bond yields have gapped to new all-time lows this morning: The short end has now fully priced one rate cut. The curve has steepened in recent times as rate cuts approach but it isn’t convincing: Negative spreads to the US are printing historic new wides: Every
The conduit through which the RBA has traditionally passed its corrupt leaks about monetary policy movements opened on the weekend, via Terry Mccrann: It is the first time in the more than two-and-a-half years that Philip Lowe has been governor that there is even actually the possibility of an official rate change from the RBA. …Whatever
Via the AFR today comes Chris Joye: It would be incredibly dumb to unnecessarily cut the cash rate – and possibly influence the election result – when this will get capitalised straight back into house prices and stop a desperately-needed correction in Australia’s overvalued bricks and mortar. To be clear, it is likely Lowe fails this intelligence
Via Ray Dalio of Bridgewater: This article is for folks who are interested in economics, especially about how monetary and fiscal policy will work differently in the future. It will focus on Monetary Policy 3 (the new type that we will see more of around the world) and Modern Monetary Theory (a recently proposed new approach
Here’s the chart that has destroyed the credibility of the Reserve Bank of Australia: And here is the very obvious reason why it failed so horribly: The bank focused on unemployment when it should have been watching underemployment. Now, here is a sample of the lives that the RBA has made much worse than they
Via the AFR comes National Australia Bank chief executive Philip Chronican: …who has dismissed calls for an interest rate cut when the Reserve Bank of Australia meets next Tuesday, saying it was unnecessary and would do little to stimulate the economy. …”Whether or not there is an interest rate cut I don’t think it will have
Via some very temporary factors, via Banking Day: Australia’s largest direct provider of lender’s mortgage insurance, Genworth, has recorded a sharp turnaround in first quarter profit after crystalizing monster gains on its investment portfolio. Genworth boosted its March quarter profit by A$39 million to $47.8 million as growth in new insurance written also improved during the
As expected, it is the major banks that are behind the push to corrupt APRA lending standards, via the AFR: ANZ chief executive Shayne Elliott urged the prudential regulator to scale back the buffer requiring new borrowers have the capacity to pay a 7.25 per cent interest rate, warning it was forcing the bank to
At the AFR, CEOs line up to demand…no rate cuts: “I don’t think it’s going to make any difference,” NIB Holdings chief executive Mark Fitzgibbon said on the sidelines of the Macquarie Australia conference in Sydney on Wednesday… Mick McCormack, the CEO of gas pipeline owner APA Group, warned a pre-election interest rate reduction ran
Via Terry Mccrann: A rate cut at next Tuesday’s Reserve Bank meeting is possible but remains most unlikely. I have to at least allow for the possibility after my unqualified prediction last week that there would not be a cut — against the all but entire economentariat rate-cut consensus — as my comment contained a
This time via the excellent Damien Boey at Credit Suisse: It has been widely reported in the press that the RBA and APRA are considering cutting the interest rate applied to debt serviceability tests for mortgages by 50bps. The implication is that perhaps an actual rate cut may be unnecessary, if this measure is effective