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
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.
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
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
Let’s start with Adam Creighton: If the Reserve Bank was increasingly isolated last week, it’s marooned on a desert island this week. The central bank’s upbeat forecast of 3 per cent growth this year, which has looked increasingly shaky in the wake of last week’s sombre national accounts, was dealt a double whammy today. The
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
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
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
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
More lunatic RBA boffins throw themselves under the bus today. Via the AFR comes ex board members John Edwards: “I completely agree with Phil Lowe’s comments that in this cycle we did not see much transfer of house prices into consumption and so if it didn’t happen on the way up, I am not concerned it
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
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
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
Via Ken Rogoff at the AFR: A number of leading US progressives, who may well be in power after the 2020 elections, advocate using the Fed’s balance sheet as a cash cow to fund expansive new social programs, especially in view of current low inflation and interest rates. Prominent supporters of this idea, which is
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
Why does a lunatic RBA keep throwing itself under the bus? It began in H2 last year with a crazily bullish outlook for 2018 GDP growth just as Australia plunged into a per capita recession: Then it continued through the new year as the economy very obviously stalled with a still crazily bullish outlook for
The RBA is out with its monthly statement of lunatic ramblings and it’s neutral forever versus rate cuts ahead forever now: At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent. The global economy grew above trend in 2018, although it slowed in the second half of the year. The
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
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
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
By Justin Smirk, senior economist at Westpac Key points: The CPI rose 0.5%/1.8%yr in Q4; the average of the RBA core inflation measures rose 0.4%qtr/1.8%yr. Inflation continues to hold under the RBA’s target band and with the two quarter annualised pace running at 1.2% suggests it is unlikely get back into the band anytime soon.
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.
Not least because they point backwards while leading indicators are in the toilet. More from Damein Boey at CS: The unemployment rate remained steady at 5%. Overall, a very strong jobs number. But cold comfort for the RBA, given that employment is a lagging indicator, and the weight of evidence is pointing to a very