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.

5

Joye explores RBA QE

Chris Joye on Aussie QE: Because most of our borrowers pay “variable” as opposed to “fixed” rates of interest, the cost of borrowing in Australia prices off short-term (variable) rather than long-term (fixed) interest rate benchmarks. In the US during the crisis, the Federal Reserve bought long-dated government bonds to reduce the risk-free rate that

4

Ellerston: RBA gunna cut after election

Excerpted from Brett Gillespie at Ellerston Capital: For my regular readers, this month’s note is a little different. Briefer with one myopic focus. This month I am going to focus on Australia, and specifically the Reserve Bank of Australia (RBA). For the first time in over 2 years, we had a very “live” RBA meeting

11

UBS: RBA set to cut on jobs rounding error

Yes, this is what monetary policy has come to, via George Theranou at UBS: The RBA seems to be shifting from inflation targeting towards the labour market as the key policy driver. Their April minutes noted a scenario to cut “would likely be appropriate”…”where inflation did not move any higher and unemployment trended up”. Furthermore,

24

The RBA needs reform not more corruption

Via AFR: Former Reserve Bank of New Zealand governor and architect of its inflation target band Don Brash has cautiously come out in favour of Australia reviewing its inflation target due to persistently lower levels of inflation. “It makes sense to review it,” he told The Australian Financial Review. “But I have mixed feelings about how that

33

Did “those MacroBusiness bastards” disrupt the RBA’s sanity?

Weeoo, weeoo, weeoo. Via The Pascometer: The RBA has been predicting higher wages growth ever since before it started weakening. Year after year after year, wages have been about to run higher, according to the RBA – but they haven’t. That the governor is reduced to a wan “some pick-up” might indicate how confidence in

13

RBNZ humiliates lunatic RBA again

Let’s invite a reverse takeover of the RBA by the RBNZ which just cut its cash rate to 1.5bps: The Official Cash Rate (OCR) has been reduced to 1.5 percent. The Monetary Policy Committee decided a lower OCR is necessary to support the outlook for employment and inflation consistent with its policy remit. Global economic

8

Bill Evans on the RBA hold

Via Bill Evans at Westpac: The Reserve Bank Board decided to leave the cash rate unchanged at 1.50%. This was Westpac’s forecast, although markets were uncertain, with around a 50% probability priced in for a rate cut and 14/26 market economists  forecasting a cut (Bloomberg survey 3 May).There are two main reasons behind this decision.

3

Shadow RBA tracks lunatic into irrelevance

It’s almost turned dovish: Shadow Board Sees Downside Risks to Australian Economy Increasing but Interest Rates Should Remain Steady Significantly, Australia’s inflation rate has fallen to 1.3% in the March quarter, putting it well below the Reserve Bank of Australia’s official target band of 2-3% and thus confirming economists’ concerns of a weakening economy. The

7

Mccrann: RBA meeting “live”

The conduit through which the RBA has traditionally passed its corrupt leaks about monetary policy movements opened on the weekend, via Terry Mccrann: It is the first time in the more than two-and-a-half years that Philip Lowe has been governor that there is even actually the possibility of an official rate change from the RBA. …Whatever

19

Bank’s APRA cut lobbying failed?

Via the AFR today comes Chris Joye: It would be incredibly dumb to unnecessarily cut the cash rate – and possibly influence the election result – when this will get capitalised straight back into house prices and stop a desperately-needed correction in Australia’s overvalued bricks and mortar. To be clear, it is likely Lowe fails this intelligence

44

Ray Dalio: Bring on MMT!

Via Ray Dalio of Bridgewater: This article is for folks who are interested in economics, especially about how monetary and fiscal policy will work differently in the future. It will focus on Monetary Policy 3 (the new type that we will see more of around the world) and Modern Monetary Theory (a recently proposed new approach

6

Pre-nationalisation Genworth booms

Via some very temporary factors, via Banking Day: Australia’s largest direct provider of lender’s mortgage insurance, Genworth, has recorded a sharp turnaround in first quarter profit after crystalizing monster gains on its investment portfolio. Genworth boosted its March quarter profit by A$39 million to $47.8 million as growth in new insurance written also improved during the

18

CEO hubris erupts around lunatic RBA

At the AFR, CEOs line up to demand…no rate cuts: “I don’t think it’s going to make any difference,” NIB Holdings chief executive Mark Fitzgibbon said on the sidelines of the Macquarie Australia conference in Sydney on Wednesday… Mick McCormack, the CEO of gas pipeline owner APA Group, warned a pre-election interest rate reduction ran

4

RBA anus doves up

Via Terry Mccrann: A rate cut at next Tuesday’s Reserve Bank meeting is possible but remains most unlikely. I have to at least allow for the possibility after my unqualified prediction last week that there would not be a cut — against the all but entire economentariat rate-cut consensus — as my comment contained a