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.

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Why is the RBA talking about climate change?

Via Damien Boey at Credit Suisse: Overnight, RBA Deputy Governor Debelle delivered a speech about climate change, and its implications for economic policy. Some key points are as follows: Climate change affects the agricultural sector of the economy. While agriculture is becoming less significant from a GDP perspective, food prices are still a major driver

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Consumer sentiment plunges with growth

Via Westpac: The Westpac-Melbourne Institute Index of Consumer Sentiment fell 4.8% to 98.8 in March from 103.8 in February. The consumer mood deteriorated in March, sentiment falling to its lowest level since September 2017. With the index moving back below 100, pessimists again outnumber optimists. That contrasts with the ‘cautiously optimistic’ reads that prevailed throughout

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Aussie bonds rampage to new highs

For some reason it didn’t happen yesterday with the terrible data but this morning Aussie bonds are off as weak US inflation cuts the leash. The entire price deck has shunted higher with long end yields ripping towards the 2016 all time lows (which I reckon they will take out with ease, 1% ten year

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Lunatic RBA needs emergency 50bps interest rate cuts

Oh yeh. From Damien Boey at Credit Suisse: Our proprietary domestic demand tracker uses NAB survey capex intentions, along with consumer sentiment, housing sentiment, retail sales, credit, building approvals and the depth of the infrastructure spending pipeline. After updating for today’s data, the indicator remains in the doldrums, consistent with negligible growth in the non-mining

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Lunatic RBA leaps into “policy error”

Via the AFR comes the lunatic RBA’s latest propaganda spill: …Reserve Bank of Australia Governor Philip Lowe is calling for solutions to a puzzle where employment is growing but GDP is softening. But one of Australia’s more experienced economists, former ANZ chief economist Warren Hogan, said it was time for economists to consider employment data with

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UBS: Credit crunch to intensify

Via The Australian comes UBS’s George Tharenou: “My framework here is that the regulatory tightening is accelerating, so the only effective policy lever available in the near term to stimulate the economy is the cash rate,” he says. “There’s a view that the royal commission was benign because it didn’t change law, but we never

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Aussie bonds boom again as NAB mulls full rate cut cycle

Everyone except the lunatic RBA is racing in one direction now, including NAB’s Alan Oster: “We now think that the RBA will make two rate cuts in 2019. Growth appears to have lost significant momentum, placing at risk further improvement in the labour market at a time when inflation poses little constraint on policy and

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AMP hikes mortgage interest rates

Via Australian Broker: Weeks after posting a 97% drop in profits, a wealth management company has announced changes to its home loan offerings. In the next few days, AMP Bank plans to decrease a range of fixed rate loan options as well as increase variable rates. “We have held off passing this cost on to

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Why is MMT the new black?

Modern Monetary Theory or MMT seems to be being discussed everywhere lately, and a number of high profile debates between the economic establishment such as Paul Krugman, Ken Rogoff, Jerome Powell and Larry Summers on one side and MMT advocates (most of which are not economic luminaries) have broken out. The key difference in the

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UBS: Banks won’t pass on rate cuts

Via UBS’ excellent Jonathon Mott today: The recent reporting season highlighted the revenue pressure the banks are under. The substantial mortgage repricing undertaken by the banks over the last six months has already been largely offset by: higher funding costs; front-book discounting; switching from Interest-Only to P&I; mix changes from Investors to Owner Occupiers and

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Bloxo raises hand to run lunatic RBA

Amusing stuff from the next Governor of the lunatic RBA, Bloxo at HSBC: For the RBA, the numbers surprised to the downside (relative to the forecasts they published on 8 February). The RBA had GDP growth of 2.8% y-o-y — today’s result was 2.3% y-o-y. downside surprises … sharp fall in dwelling investment and the

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RaboBank: Blame RBA & APRA for housing bubble and bust

In the post truth world, stating the obvious today makes you a veritable genius, via Micheal Every at Rabobank: Coincidence and subsidence Only three trade war updates today worth mentioning, all of which should leave markets brimming with optimism. First, it has been reported that China has hacked 27 US universities to try to steal

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Westpac: Stay long Aussie bonds

Via Westpac: Westpac’s RBA forecast means its too early to take profit. Source: Bloomberg, Westpac Given Westpac’s altered RBA and Fed outlooks, we have a very different forecast for the benchmark AU-US 10yr bond spread than is currently factored-into the forwards (left chart). Indeed, forward pricing suggests that the 10yr spread has already bottomed, while

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Lunatic shadow RBA demands hike

All care and no responsibility as usual: Shadow Board’s Conviction that Rates Should Remain on Hold Strengthens Australia’s economy is not showing a clear direction. CPI inflation, most recently equal to 1.8% in the December quarter, remains below the Reserve Bank of Australia’s official target band of 2-3%. The official unemployment rate is steady at

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GDP shocker builds

Goodness me, business indicators just printed a shocker: Damien Boey at Credit Suisse sums it up nicely: The Consensus “now-cast” for 4Q GDP growth is converging on 0.2%. But today’s inventories data suggests that there is downside to this figure as well. We had expected that with domestic demand growth slowing so sharply, inventory build

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Phil Lowe maintains Futureboom! charade

Right on cue in Parliament comes the Governor of the Lunatic RBA: My colleagues and I welcome this opportunity to share our views on the Australian economy and the RBA’s important policy responsibilities. These hearings are an essential part of the accountability process. Two weeks ago, we released our latest forecasts for the Australian economy.