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.
Via FTAlphaville: We wrote yesterday about how the revival of dollar swap lines on far more relaxed terms was by far the most important thing the Federal Reserve has done thus far. However, there are some flaws – chief among them that there is no swap line between the US central bank and its Chinese counterpart, the
Bond markets. Whoa! Last night Treasury yields jack-knifed again: Why is not clear. There was rumour and scuttlebutt around Trump’s $1tr simulus. But inflation breakevens are crashing: So the Treasury sell makes little sense in terms of a punt on a v-shaped recovery and/or fiscally induced inflation. That leaves us with risk parity fund liquidation,
Cross-posted from FTAlphaville: Few things are as likely to imbue us with that sense of global financial crisis déjà-vu than a dollar swap line. Last night the Federal Reserve announced it was easing the terms on which it provides foreign banks access to greenbacks. The swap lines in four of the five locations listed in
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Via Damien Boey at Credit Suisse: Over the past few days, we have seen the stimulus headlines come in thick and fast: The US government has come up with a coronavirus stimulus package with bipartisan support, with payroll tax recovery to be debated at a later date. The Fed has just cut rates all the
From Phil Lowe just now: As Australia’s financial system adjusts to the coronavirus (COVID-19), financial regulators and the Australian Government are working closely together to help ensure that Australia’s financial markets continue to operate effectively and that credit is available to households and businesses. Refer to earlier CFR press release. Australia’s financial system is resilient and it is
The media fixation with equities has completely blinded it to what matters. The global economy is about to take an immense loss. Equites are going down with it, as they should. Nothing can stop that now. But all that matters in terms of systemic risk is credit. That’s the Fed’s target. To unwind the dislocation
Alan Kohler springs to life: It’s now clear to us all that the problem for authorities is to try to prevent the health system from being overwhelmed without causing an economic depression. That’s with D, as in 10 per cent GDP contraction, not an R for a two-quarters recession, which is already a given. Prime
From the RBA and its somnabulant friends: Statement by the Council of Financial Regulators – March 2020 As Australia’s financial system adjusts to the coronavirus (COVID-19), financial regulators and the Australian Government are working closely together to help ensure that Australia’s financial markets continue to operate effectively and that credit is available to households and
Via FTAlphaville: There’s growing evidence that markets think central banks have reached the limits of their capabilities. Even if they haven’t, it’s what markets think that really matters. Gillian Tett recounts this point really well in her column today. Read that here. As she notes: But it might also reflect something else: some investors no longer
John Kehoe is close to the RBA and writes just now: The Reserve Bank of Australia may be forced into an emergency monetary policy easing after central banks in the United States and New Zealand slashed interest rates to almost zero overnight. …The RBA may soon resort to an unscheduled rate cut and unconventional stimulus
Cross-posted from Zero Hedge on some seriously fucked global financial plumbing. As Bank of America’s rates expert, Mark Cabana – formerly of the NY Fed – writes on Saturday, “the Fed has been on fire” lately, which in light of the Fed’s activities in the past two trading days of the week, may be an
At Banking Day: Macquarie Bank has joined National Australia Bank in withdrawing hybrid security offers, with both citing market volatility and its likely impact on the price of the notes once they listed. Macquarie withdrew its A$500 million offer of Macquarie Capital Notes 2, which it had launched on February 11, saying it made the
Via the RBNZ this morning: The Official Cash Rate (OCR) is 0.25 percent, reduced from 1.0 percent, and will remain at this level for at least the next 12 months. The negative economic implications of the COVID-19 virus continue to rise warranting further monetary stimulus. Since the outbreak of the virus, global trade, travel, and
You’ve got to love equities. They are the true village idiot of markets. Convulsing one way or the other until they are finally right by random walk! Meanwhile, credit has no choice but to reflect underlying reality. And what it is saying is not encouraging at all. US junk apreads are on a tear with
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Via the excellent Damien Boey at Credit Suisse: Overnight, the Fed announced it will be increasing its repo size to $1 trillion per week, while the ECB announced more liquidity management and asset purchase measures (refraining from cutting rates into more negative territory). Yet despite all of this massaging, bond yields rose into the close,
From the Bank of Canada overnight: In order to support the continuous functioning of financial markets through the provision of liquidity, the Bank of Canada announced two measures today. First, acting as fiscal agent, the Bank will broaden the scope of the current Government of Canada bond buyback program. This is intended to add market
From Christopher Metli, head of Quantitative and Derivatives Strategy at Morgan Stanley: The stresses in many areas of the financial markets are spreading. The market is increasingly pricing in a seizing of the real economy as the market awaits more details on the timing and scope of response. Compounding these problems is growing financial stresses as cash becomes
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Here’s the statement from an emergency, out of cycle meeting at the Bank of England: The front line of combatting the challenges of Covid-19 comprises the extraordinary efforts of NHS health professionals, carers, and volunteers across the country, as well as the exceptional support by the FCO to UK citizens abroad. The Bank of England’s
From the loon just now: The Virus and the Australian Economy Guy Debelle, Deputy Governor Thank you for the opportunity to speak to you today. I had been intending to talk about investment, the theme of this conference. But, given the circumstances, instead I will provide a summary of how the Bank is seeing developments