An excellent note from UBS. My own view remains that the next move in rates is down as commodities crash, macroprudential stalls housing and border reopening kills wages. How many rate hikes will the RBA deliver? This time also depends on liquidity The RBA note Australia’s recovery out of the pandemic is stronger than anyone
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.
In the Q&A to yesterday’s Keynote Address at the Australian Farm Institute Conference, RBA Governor Phil Lowe stated that the Council of Financial Regulators (i.e. RBA, Treasury, APRA and ASIC) are actively looking at macroprudential tools to curb the mortgage/property market (listen from around the 34 minute mark): “The Council of Financial Regulators meeting last
BofA with the note to break inflationists hearts. What is so amusing about this is that as transitory inflation reverses, it is going to deliver a very large disinflationary shock next year at which point we’ll have to argue that that is transitory as well! Strong price pressures have materialized in the economy over the
Deutsche with the note that should make AUD bulls shiver: For global markets, the US April CPI was by far the most eye-catching inflation release, but there are enough indications from individual country data and now the latest PMI reports, that bottleneck price pressures are a global phenomenon. Which begs a few questions: what are
Goldman with the note: The FOMC left the funds rate target range unchanged at 0–0.25% at the June meeting, and raised the IOER and RRP rates by 5bp. The median projected path for the policy rate in the Summary of Economic Projections (SEP) increased to show two hikes by 2023, despite almost no change in
Below find the latest installment from an uber-dovish Phi Lowe. The AUD rose a few pips though god only knows why. This is as dovish as he could possibly get: no inflation, no wage growth, recovery incomplete, no macroprudential (which will come first). Nothing hawkish. And he sure isn’t going to tighten when so much
Nataxis with the latest on Bitcoin: Bitcoin: adjustment nearly over? Since mid-May, Bitcoin and crypto assets have been in crisis. After a high at $63,500, Bitcoin collapsed to almost $30,000, Ethereum went from a high of $4,400 to a low of $2,000. The capitalisation of crypto assets has fallen from a high of $2 tr
Via the RBA Minutes: Considerations for monetary policy In considering the policy decision, members observed that the global economic recovery from the pandemic had continued and the outlook was for strong growth in output in 2021 and the following year. Policy settings and the pace of COVID-19 vaccinations had supported global economic activity, but the recovery remained
According to Bloomie, hedge funds are long the Australian dollar: Leveraged funds hold a net long position of 20,509 contracts in the currency. Various hedgies talked their own book for higher on the forthcoming speech by Phil Lowe and the next jobs report. Actually, the overall market is now short the AUD by 9k contracts
Goodbye TFF, goodbye rock bottom mortgages. ANZ just double-hiked its fixed-rate mortgages on the four year to 2.49% and five year to 2.69% The discounted variable is at 1.94%. This process will continue for months yet as banks are forced to refinance into more expensive wholesale debt as the RBA ends its Term Funding Facility
Us yields may be falling owing to the peak in its inflation burst and coming disinflationary bust, but they can;t down to Aussie yields which are falling even faster. The Aussie 10 year yield inverted negative versus the US for the first time in eight months overnight. During the recent bond back-up the spread blew
With this note from Deutsche: Ronald Reagan (1978): “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.” Joe Biden (2021): “A job is about a lot more than a paycheck. It’s about dignity. It’s about respect. It’s about being able to look your kid in the
The NAB business survey used to be a quite useful forecaster of GDP and its segments. These days it’s become more like a PMI, only useful for directional rather than positional judgements. To wit, this is an unprecedented boom across all metrics: Capacity utilization has been pushed the highest measures in living memory which would
Bill Evans at Westpac with the note: The RBA Board is likely to decide that there will be no extension of the YCT to the November 2024 bond at the July Board meeting because such action would imply no tightening till 2025. Westpac disagrees with that interpretation but cannot dispute the resulting decision. Not extending
Goldman has a note today that will scare the willies out of Australians: Central banks and especially financial markets believe that the neutral real short-term interest rate (r*) is extremely low. The major G10 central banks estimate r* at ¼-½%, while markets appear to be pricing about 0% in the US and -1½% in Europe.
Chris Joye with the note: The RBA has provided clear signalling that in July it will move to a new form of open-ended quantitative easing (QE) at the current run-rate of $5 billion of bond purchases each week, which will be periodically reviewed. This will avoid the policy rigidity of static, five monthly QE programs
Bill Evans at Westpac with the note: As expected the Reserve Bank Board kept its policy settings unchanged at the June Board meeting. The key talking point from the Governor’s Statement was the omission of “The Bank is prepared to undertake further bond purchases to assist with progress towards full employment” when discussing its deliberations
No more Mr Hawk at the Shadow RBA: Cash rate should stay on hold for at least another year – Shadow Board The lockdown in Victoria serves as a potent reminder that Covid-19 can affect the domestic economy unexpectedly at any time, at least until a large proportion of the Australian population is vaccinated. The
Spot on note from Albert Edwards at Societe General: Surveys suggest that inflation fears have become investors’ number one concern. But why look at it that way? We could equally say it is investors’ own bullishness on the strength of this economic cycle that is driving prices sharply higher in the most cyclically exposed equity
Yesterday the NZD carried the Australian dollar higher after a hawkish RBNZ statement: Now that operational constraints have been addressed and the OCR can be lowered further if necessary, we believe it is appropriate to return to our long-standing practice of publishing an OCR projection (figure 2.17). This projection is conditional, in that it communicates
Nordea with the note: The “boundless” costs of the pandemic leave governments with no choice but to finance lockdowns with increasing public debts. As long as central banks hold a large part of the bond market, long bond yields can increase without huge repercussions. Highlights: Reactions to the pandemic are stronger than ever: Debt-to-GDP ratios
Chris Joye with the note. I agree: If the RBA’s powerful board was considering the possibility of pre-emptively tapering its monetary policy stimulus years before it had secured its goal of getting annual wages growth well above 3 per cent and, even more importantly, core inflation “sustainably” within its target 2 to 3 per cent
A great note from Nataxis on US inflation. Chill! Historical Backdrop In the post-WWII period, the United States has seen just a couple of problematic periods of significant inflation. The most recent of which was a 10-year period with two bursts of accelerating inflation in the 70s/80s. First, inflation quickly accelerated in 1973, before peaking
If inflation is coming it is going to have to overcome one yawning gulf in the global output gap. The US has the best chance. Goldman with the note: Exhibit 5 presents our long-run output gaps for the US, Euro Area, Japan and UK. The appendix shows our country-by-country output gap and NAIRU estimates compared
Listen to the Chinese bond market because it tells you what is coming for the world, especially Australia. As Chinese inflation has surged in recent months, its yields keep on falling: Chinese factory inflation is running high and global inflation surging. Global money inflows and abundant liquidity are to blame. BTFD is in action. So,
Or, at least, take the froth off the top. Chris Joye with the note: RBA TFF expiry in June lift fixed-rate mortgage rates. Low fixed rates were 40% of all new borrowing. Banks will need to refinance $150-350bn of RBA funding at higher market rates. Housing to remain strong for years. Quite right, though I
Via the excellent George Tharenou: Budget: only $8bn budget improvement over 5 years; given $96bn stimulus The Australian Government Budget, relative to the MYEFO released in Dec-20, forecasts a far smaller than expected cumulative improvement over the 5 years to 24/25 of only $8bn. Positively, 20/21 is a material $37bn better at $161bn (UBSe: $148bn,