ANZ-Roy Morgan’s latest consumer confidence report shows that sentiment remains in the gutter on increasing concerns around inflation. As shown in the next chart, consumer confidence is tracking at the lowest level since last winter’s Delta outbreak: Meanwhile, weekly inflation expectations rose 0.4ppt to 6.4% last week, its highest weekly reading since June 2012: As
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.
A quick update on yield curves this morning. The market hysteria we’ve been tracking year hit new levels on Friday as the Aussie bond curve steepened to forecasting the largest and most inflationary boom of this century” Meanwhile, the same bond market is bury pricing a forthcoming US recession: The difference between the two curves
With each passing week, it gets more outlandish. Markets are now pricing nearly eleven straight rate hikes by July 2023. Assuming the tightening begins in June, that’ll be a hike every meeting for 13 months or a whole swag of 50bps hikes. Via Westpac: Here is what this will do to Aussie households: If OCR
For much of this year, I have been skeptical of interest rates increases in Australia. There were five reasons for this. First, the Australian labour market is still struggling to deliver wage gains consistent with sustainably rising inflation. In the latest data, only a fifth of surveyed labour market segments are delivering wage gains above
The Conversation’s Peter Martin has published an interesting article explaining why the Reserve Bank of Australia (RBA) will be reluctant to lift interest rates, despite soaring inflation. Martin’s key contention is that Australia’s inflationary pressures have been imported via soaring oil prices from the Russian-Ukraine war and supply-side bottlenecks impacting inputs like semiconductors. Accordingly, lifting
Goldman with the note. As they say, it’s not the first rate hike that stocks need to worry about, it is the second-last one. That just moved materially closer. — In a speech earlier today, Chair Powell said, “There is an obvious need to move expeditiously to return the stance of monetary policy to a
Stuart Wemyss, an independent financial adviser, penned an article playing down concerns that rising interest rates could crash Australia’s property market. According to Wemyss, “financial theory, which proves there is a strong relationship between interest rates and asset values, cannot be used to explain property price movements”. Wemyss also claims there is a “weak historic
The Australian Treasury is preparing a review of the Reserve Bank of Australia (RBA), examining how the Bank’s first independent examination will proceed. The RBA is the only major central bank in the developed world not to have undergone an external or independent review this century, with the last review taking place in the early
Australia is headed for the highest interest rates in the developed world. If you believe markets, that is, which are now pricing nearly eleven rate hikes by mid-2023. Westpac: If one were to try to find rationality in this it would be in the commodities boom which has delivered a positive terms of trade shock.
Unions covering workers in sectors such as public hospitals, construction and hospitality are looking at wage claims of between 5% and 6%, with their members no longer happy with 3% pay rises. Their call comes amid suggestions that consumer price inflation will rise to 5% cent by June, although it is expected to ease in
Amusing isn’t it? Markets are still preparing to halve Aussie house prices by hiking interest rates ten times by mid-2023. Via Westpac: According to the RBA house price model, a tightening of credit of this magnitude and speed will crash house prices somewhere between a third and a half of value. It’s easy enough to
As we know, financial markets are tipping the Reserve Bank of Australia (RBA) will lift the official cash rate by 2.15% by June 2023 – the equivalent of nine rate hikes (yellow line below): On Tuesday, the RBA released its Minutes of the Monetary Policy Meeting of the Reserve Bank Board, which again pushed back
ANZ-Roy Morgan has recorded a strong rise in inflation expectations, which has jumped to 5.6% – its highest reading since November 2012 on the back of soaring petrol prices: This drove the consumer confidence index down 4.3% to its lowest level since October 2020: According to ANZ’s head of Australian economics, David Plank: Household inflation
Federal Treasurer Josh Frydenberg has flamed the hysteria over interest rates, warning voters that markets are predicting 2%-plus of interest rate rises over the next two years: Treasurer Josh Frydenberg has warned Australians to brace for higher interest rates… In an exclusive interview with The Sunday Age and The Sun-Herald, the Treasurer put Australians on
BofA with the note. This is a good demostration of why markets are currently pricing in a very steep Aussie the bond curve forecasting a boom when pretty much everywhere else is bear flattening into a bust. I don’t buy it for a number of reasons: Liquidity is usually symptom not cause in risk-free assets.
On Friday, MB’s David Llewellyn-Smith published the latest market forecasts on monetary tightening, which tipped the Reserve Bank of Australia (RBA) would lift the cash rate by around 2.15% by June 2023 (yellow line below): Such tightening, which is predicted to begin in May this year, would be the equivalent of nine interest rate hikes.
Earlier this week I showed how fixed rate mortgages have ratcheted up, rising by 0.48% (< 3 years) and 1.08% (>3 years) from their bottom last year: The story is different for variable mortgage rates. These have continued to trend lower, with the average rate available for new mortgages hitting an all-time low 2.52% in
By Gareth Aird, head of Australian economics at CBA. My view is that the RBA will wait until late in the year (after annual wage growth has risen above 3%) before lifting rates. Key Points: RBA Governor Philip Lowe today sounded closer to raising interest rates than at any other time over the pandemic. The
Westpac with the note. I maintain the view that it is 50/50 the RBA will get to hike at all. — This is the weakest print since September 2020, which is also the last time the index was below the 100-level indicating that pessimists outnumber optimists. That previous low marked the end of a fifteen-month
RBA Governor Phil Lowe has just delivered a speech entitled “Recent Economic Developments”, where he pushed back against predictions of imminent rate rises, but noted that “it is plausible the cash rate will be increased later this year”. Below are extracts of the speech, with key points highlighted in bold: The journey towards full employment
Economics have warned that Australia’s inflation rate is likely to reach 5% by June, a level last seen in 2008 when the crude oil price topped $US160 a barrel. Diana Mousina of AMP says the invasion of Ukraine has resulted in higher consumer prices, while the floods in NSW and Queensland will put upward pressure
Westpac has the note: Fears around funding have started to impact rate sets pushing BBSW higher despite little reason for a sustained AUD funding squeeze. BBSW rate sets have been rising fast 3m BBSW vs 3m US CP Swapped into AUDBBSW rate sets and BBSW-OIS spreads (left chart) have been widening rapidly, with 3m BBSW