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.

20

Gotti advises Xi on how to occupy Australia

Via Gottiboff: First, Australia needs to recognise that it is not all China’s fault. In past years we have behaved badly and contributed to the current situation. At the same time China is now a different country and is ruled by a strongarmed dictator plus the Communist Party. Not surprisingly “The Art of War” offers

24

Bill Evans: MOAR RBA QE coming

Via Bill Evans at Westpac: The Reserve Bank Board’s minutes for its December meeting emphasised that the Board is committed to substantial policy support for a considerable period. The Minutes note that “Substantial policy support would therefore be required for a considerable period”. Despite recent encouraging economic developments around the distribution of vaccines in both

6

UBS: More RBA QE to come in 2021

Via George Tharenou at UBS: RBA still expected to extend QE, but what if they taper? The materially better-than-expected Australian domestic data flow (amid ~zero local COVID-19 cases) has raised speculation that the RBA will not extend its $100bn QE program beyond the scheduled end in Apr-2021, and may even also remove its 3-year YCC

3

What drove Aussie debt negative?

Via Banking Day: Australia’s Treasury Note tender saw a negative yield for the first time ever, thanks to demand from overseas investors looking for short-term instrument to park cash. At the AOFM’s weekly tender on Thursday, the lowest accepted yield on the March 2021 T-Note was -0.01 per cent, compared with 0.01 per cent at

10

Labor: Muzzle Phil Lowe

Via the AFR: Over the last year, Dr Lowe has provided views on the impact on wages from higher superannuation, regulation requirements around responsible lending laws and buy now, pay later providers, and the need for state governments to contribute more of the fiscal heavy lifting during the COVID-19 recession. But Mr Jones thinks Dr Lowe has gone too far.

72

When will APRA hose off house prices?

That god for this article at the AFR: Australia’s banking watchdog is expected to step in and cool the rebounding housing market in 2021, after New Zealand’s central bank telegraphed stricter loan rules are needed to arrest the country’s rising house prices. The Reserve Bank of New Zealand took a step towards curbing rapidly rising

9

The RBA is right. House prices are not its job

Phil Lowe yesterday in Parliament: Speaking at a parliamentary economics committee meeting in Canberra, Dr Lowe said the aim of the bank in lowering borrowing cost was to “free up cashflow” for households to spend. “It would be inappropriate for us to target asset prices,” Dr Lowe said. “That’s not our job and shouldn’t be

11

RBA holds, happy to print MOAR

Today’s statement: At its meeting today, the Board decided to maintain the current policy settings, including the targets of 10 basis points for the cash rate and the yield on 3-year Australian Government bonds, as well as the parameters of the Term Funding Facility and the government bond purchase program. Globally, the news has been mixed

1

Pointless Shadow RBA falls into line

Via The Shadow: The coronavirus is now well contained in Australia, Victoria has lifted many of if its restrictions, and most state borders have opened. Unless there is another outbreak that prompts strong action, Australia should be able to reap the economic benefits of this normalisation. The inflation rate (0.7% year-on-year based on the latest

14

NZ mulls adding house prices to RBNZ mandate

Via Bloomie: New Zealand’s government has proposed adding house prices to the central bank’s remit to rein in an overheating property market, prompting investors to reduce bets on lower interest rates. The local dollar jumped. Finance Minister Grant Robertson said Tuesday he has written to Reserve Bank Governor Adrian Orr, asking him to consider amending

6

McKibbin talks RBA nonsense

Professor Wazza McKibbin at the AFR today: Former Reserve Bank board member Warwick McKibbin says the central bank’s $100 billion quantitative easing program will not stimulate the economy, but will help stave off a financial crisis if the global outlook takes a turn for the worst. The Australian National University professor said the central bank’s

10

Markets ignore fully doved RBA

Minutes just now: International Economic Developments In their discussion of international economic developments since the previous meeting, members noted that the global economy was in the early stages of recovery following the largest contraction in decades. GDP outcomes in major economies in the September quarter had generally been somewhat better than expected after very large

9

Non-banks dial TFF whaaambulance

Via Banking Day: A leading non-bank mortgage lender has warned that non-banks originating prime mortgages face tough market conditions, largely as a result of the pricing impact of the Reserve Bank’s term funding facility. Firstmac chief financial officer James Austin said non-banks have had the benefit of the Australian Office of Financial Management’s Structured Finance

4

Nikko: RBA at zero for seven years

Via Nikko: For the past six months, the RBA has been subdued at using unconventional policy compared to offshore. After six months of sitting on the sidelines, the RBA has finally eased rates. Chris Rands, Portfolio Manager, Fixed Income at Nikko Asset Management has penned a piece exploring the RBA’s delay to move and ease

15

RBA: Your wage is about to tumble

Via the RBA’s SoMP: Wages growth declined in the June quarter Growth in the Wage Price Index (WPI) slowed to 0.2 per cent in the June quarter, to be 1.8 per cent higher in year-ended terms (Graph 5.14). These quarterly and year-ended growth rates were the slowest in the history of the series. Private sector wages growth slowed to 0.1 per cent

8

Still more on RBA printing

Via Bill Evans at Westpac: As expected the Reserve Bank Board decided to cut the cash rate target from 0.25% to 0.1%; cut the target yield on the 3 year bond from 0.25% to “around” 0.1%; cut the rate on new drawings under the Term Funding Facility from 0.25%  to 0.1%; and cut the rate

6

The full RBA drivel round-up

It’s not quite wall-to-wall RBA drivel but it’s close. The AFR is a monetary swamp, as usual. First up is a waffling Richard Holden: The Reserve Bank of Australia did exactly as it signalled and markets expected by cutting the cash rate to 0.1 per cent and expanding its bond-buying program on Tuesday. Now that