Via Bloomie over the weekend: President Donald Trump has discussed firing Federal Reserve Chairman Jerome Powell as his frustration with the central bank chief intensified following this week’s interest-rate hike and months of stock-market losses, according to four people familiar with the matter. Advisers close to Trump aren’t convinced he would move against Powell and
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 UBS’s excellent George Tharneou: The removal of the Interest Only cap is unlikely to result in a re-acceleration of housing credit growth in our view. The major banks should continue to tighten underwriting standards as they move towards complying with Responsible Lending laws (i.e. verifying customer income and expenses) in response to the Royal
Via the UBS rates team today: The RBA Sentiment Index – our proprietary tracker for hawkishness/dovishness in the RBA minutes – shows that the bank’s tone turned more dovish at its meeting in November. Notably, the index has turned negative for the first time since September 2016, when Dr Lowe became Governor. This has been
Via Bloomie: Sydney’s plunging house prices are usurping a prolonged wage slump as the key worry for the central bank, with markets now showing more chance of an interest-rate cut than a hike in 2019. Prices in Australia’s biggest city have tumbled 10 percent and some economists are tipping a similar fall next year. While
Minutes from the silly bastards at the RBA: International Economic Conditions Members commenced their discussion of the global economy by noting that conditions had remained positive, particularly in the major advanced economies, where growth had remained around or above potential and labour markets had continued to tighten. However, growth in a number of economies had
The AFR is reporting as much: Banks will be forced to pay financial compensation and remediation to every bank customer who has been wronged, as the Labor Party signalled a tough response to the Hayne royal commission if it wins power. The ALP has also signalled it is likely to pursue comprehensive consumer law reform
Via Ian Rogers at Banking Day: A Tier 1 capital ratio of 16 percent of RWA is needed to ensure the banking sector retains creditor confidence after enduring an extreme shock. This is four times what is was 30 years ago, and Australian banks and their systemically risky subsidiaries in New Zealand are nowhere near
Via the excellent Bill Evans at Westpac today: What do our economic forecasts for 2019 mean for Investors? Our key economic themes are: Australian economy and markets • Growth in the Australian economy will slow in 2019 under the weight of political uncertainty; falling house prices; a contraction in residential construction; global volatility; and a
APRA released it quarterly ADI property exposures yesterday and banks continue to defuse the interest-only time bomb. IO was only 16% of mortgage flows at $14.4bn: And the stock outstanding IO loans fell sharply again to 26% of the book or $434bn: This is down from a balance of $542bn when macroprudential 2.0 began. It’s
Oh yes, via Bloomie: In the bond market, the yield curve for overnight index swaps — a gauge of expectations for short-term rates — has inverted, showing that traders expect the RBA’s cash rate to be slightly lower than the current 1.5 per cent in a year’s time. Similarly, the cash-rate futures market is now
The politico-housing swamp has entered a corruption blow-off. One doesn’t need to be Albert Einstein to see why. House price falls are steepening and the panic in official circles is mushrooming. This week saw two extraordinary events that illustrate the circling of the wagons among the ruling class. The first was the COAG meeting which
Via Shane Oliver today: 2019 is likely to be an interesting year for the Australian economy. Some of the big drags of recent years are receding but housing is turning down, uncertainty is high around the global outlook and it’s an election year, which will add to uncertainty. This note looks at the main issues
Via NAB which now sees -15% for Sydney and Melbourne house prices: We have delayed our expectation for the first RBA increase in the cash rate to the second half of 2020. While output growth has been largely as expected over the 2018, wages pressure remains weak and hence inflationary pressure has remained low, with
Via Jonathon Shapiro at the AFR late yesterday: Housing bears are famous for hearing what they want to hear. And last week, Reserve Bank assistant governor Guy Debelle made it very easy when he dared to suggest that “quantitative easing” was a policy option. For the bears, who appear to be revelling in each set of weak auction
From RBA boffin Christopher Kent today: Thank you for the opportunity to speak at this Bloomberg event today. I’d like to address some issues about how monetary policy decisions taken elsewhere influence interest rates here in Australia. Australia is a small open economy that is influenced by developments in the rest of the world. Financial
It is a laugh a minute now for the politico-housing complex. First up the RBA, which “economists” say was actually bullish last week: Economists believe the market misinterpreted comments by Reserve Bank of Australia deputy governor Guy Debelle, whose speech on Thursday was received as dovish but in fact was “frank” and consistent in substance
From Guy Debelle, deputy governor of the RBA: It is now just over 10 years since the date that people most associate with the Global Financial Crisis (GFC), namely 15 September, the day that Lehman Brothers filed for bankruptcy.There have been quite a number of articles written in recent months looking back at that time
I like John Kehoe. He has talent. But he should be careful of what company he keeps: One quarter of soft economic activity does not make a trend, so chatter about the Reserve Bank of Australia being forced to switch its bias to interest rate cuts is premature. …the fundamentals for the local economy remain
Via the Kouk today, given he and MB are the only ones to have gotten this right: In the wake of the September quarter national accounts, and with accumulating information on house prices, dwelling investment, the global economy and spare capacity in the labour market, I have revised my outlook for official interest rates. For
Via our Shane: Given the combination of falling house prices, tightening credit conditions and constrained growth which will keep wages growth weak and inflation below target we are changing our view on the RBA from being one of rates on hold out to second half of 2020 to now seeing the next move being a
From Westpac’s Bill Evans: This result will come as a disappointment to the Reserve Bank. Note that the forecast for GDP growth in 2018 for which appeared in the November Statement on Monetary Policy was 3.5%. With the first three quarters of the year totalling 2.2% the December quarter would have to print growth of
The RBA is out with its latest hold. The statement: At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent. The global economic expansion is continuing and unemployment rates in most advanced economies are low. There are, however, some signs of a slowdown in global trade, partly stemming from ongoing
As noted, last night saw some dramatic action in bond markets. Both the US and Australia were heavily bid: The US curve inverted at the short end for the first time since 2007: By contrast the Aussie curve remains bizarrely steep, held aloft by RBA stupidity: Here are the two compared with the US clearly