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

Hysteria overtakes bond markets

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,

62

Finally RBA prints

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

16

Sleeping RBA snores even louder as ASIC part-shuts ASX

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

7

Is the IMF about to displace the US dollar as global reserve?

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

31

RBNZ rogers sleeping RBA

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

34

Liquidate everything. Are central banks losing control of interest rates?

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,

5

Bank of Canada rogers sleeping RBA

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

26

Morgan Stanley: Credit lock up “reminiscent of 2008”

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

20

Credit markets freeze up on Australian banks

The global credit crunch is worsening by the minute. Global interbank rates are ripping: European bank equity is disappearing: GSIBs have been crushed: High yield markets are blasting towards 2015 mining GFC peaks: Led by energy: Worryingly, investment grade is just as bad: Locally, Aussie banks have lost access to term funding: In reality, term

2

Bank of England rogers sleeping RBA

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