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.

14

UBS: APRA IO easing “irrelevant”, rate cuts loom

Via UBS’s excellent George Tharneou: The removal of the Interest Only cap is unlikely to result in a re-acceleration of housing credit growth in our view. The major banks should continue to tighten underwriting standards as they move towards complying with Responsible Lending laws (i.e. verifying customer income and expenses) in response to the Royal

20

UBS: Brace for interest rates cuts

Via the UBS rates team today: The RBA Sentiment Index – our proprietary tracker for hawkishness/dovishness in the RBA minutes – shows that the bank’s tone turned more dovish at its meeting in November. Notably, the index has turned negative for the first time since September 2016, when Dr Lowe became Governor. This has been

1

Regulator panic crashes Aussie yield curve towards recession signal

Via Bloomie: Sydney’s plunging house prices are usurping a prolonged wage slump as the key worry for the central bank, with markets now showing more chance of an interest-rate cut than a hike in 2019. Prices in Australia’s biggest city have tumbled 10 percent and some economists are tipping a similar fall next year. While

4

Lunatic RBA lifts AUD, slams yield curve

Minutes from the silly bastards at the RBA: International Economic Conditions Members commenced their discussion of the global economy by noting that conditions had remained positive, particularly in the major advanced economies, where growth had remained around or above potential and labour markets had continued to tighten. However, growth in a number of economies had

9

What to expect from asset markets in 2019

Via the excellent Bill Evans at Westpac today: What do our economic forecasts for 2019 mean for Investors? Our key economic themes are: Australian economy and markets • Growth in the Australian economy will slow in 2019 under the weight of political uncertainty; falling house prices; a contraction in residential construction; global volatility; and a

16

Banks continue to defuse interest only time bomb

APRA released it quarterly ADI property exposures yesterday and banks continue to defuse the interest-only time bomb. IO was only 16% of mortgage flows at $14.4bn: And the stock outstanding IO loans fell sharply again to 26% of the book or $434bn: This is down from a balance of $542bn when macroprudential 2.0 began. It’s

139

Lunatic RBA runs riot

The politico-housing swamp has entered a corruption blow-off. One doesn’t need to be Albert Einstein to see why. House price falls are steepening and the panic in official circles is mushrooming. This week saw two extraordinary events that illustrate the circling of the wagons among the ruling class. The first was the COAG meeting which

66

Shane Oliver: Housing crash to hit economy, RBA to cut

Via Shane Oliver today: 2019 is likely to be an interesting year for the Australian economy. Some of the big drags of recent years are receding but housing is turning down, uncertainty is high around the global outlook and it’s an election year, which will add to uncertainty. This note looks at the main issues

21

RBA panic intensifies

From RBA boffin Christopher Kent today: Thank you for the opportunity to speak at this Bloomberg event today. I’d like to address some issues about how monetary policy decisions taken elsewhere influence interest rates here in Australia. Australia is a small open economy that is influenced by developments in the rest of the world. Financial

83

Politico-housing complex implodes

It is a laugh a minute now for the politico-housing complex. First up the RBA, which “economists” say was actually bullish last week: Economists believe the market misinterpreted comments by Reserve Bank of Australia deputy governor Guy Debelle, whose speech on Thursday was received as dovish but in fact was “frank” and consistent in substance

106

Kouk: RBA to slash rates, Australian dollar to crash

Via the Kouk today, given he and MB are the only ones to have gotten this right: In the wake of the September quarter national accounts, and with accumulating information on house prices, dwelling investment, the global economy and spare capacity in the labour market, I have revised my outlook for official interest rates. For

6

UBS: RBA rate cut comes into view

Via UBS: Q3 domestic demand also hit a 2-year low 0.3% q/q, & down to 2.7% y/y – as Victoria slowed (0.2% q/q, 4.3% y/y), & WA eased (0.4%, -0.6%), but NSW bounced (1.1%, 3.7%). Domestic demand was driven by booming public demand (1.5%, 4.5%); adding 0.4%pts to GDP (& a large 1.0%pts y/y) –

22

RBA holds, yawn

The RBA is out with its latest hold. The statement: At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent. The global economic expansion is continuing and unemployment rates in most advanced economies are low. There are, however, some signs of a slowdown in global trade, partly stemming from ongoing

1

The bond bull market is back, baby!

As noted, last night saw some dramatic action in bond markets. Both the US and Australia were heavily bid: The US curve inverted at the short end for the first time since 2007: By contrast the Aussie curve remains bizarrely steep, held aloft by RBA stupidity: Here are the two compared with the US clearly