So say the excellent Damien Boey at Credit Suisse: RBA Deputy Governor Debelle has just delivered a “glass half-empty” speech about the housing construction cycle. Key points were as follows: 2020 shapes up as being the low year for residential construction, but the Bank can see through the trough to the other side. Long lead
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 RBA foghorn, Terry Mccrann: It will leave its official interest rate unchanged at its regular and decidedly idiosyncratic Cup Day meeting. Leaving the rate unchanged was already the most likely outcome of the meeting before Thursday’s monthly jobs data; the continuing good news on jobs made it a slam dunk. …The next rate cut,
Yeh, they’re onto it at last. Deputy Governor Guy Debelle today: The housing market has a pervasive impact on the Australian economy. It is the popular topic of any number of conversations around barbeques and dinner tables. It generates reams of newspaper stories and reality TV shows. You could be forgiven for thinking that the
Via Bill Evans at Westpac: There are two very important aspects to the minutes of the October meeting of the Reserve Bank Board. The first one relates to the conclusion to the minutes, “the Board would continue to monitor developments, including in the labour market, and was prepared to ease monetary policy further, if needed…” This language
Via the excellent Damien Boey at Credit Suisse: Minutes from the RBA’s early October meeting were dovish. The Bank highlighted: Its easing bias. That rising house prices are not a constraint on policy easing right now. The low(er) exchange rate as an especially important channel for rate cuts to be transmitted to the broader economy.
Post trade non-deal, Aussie bonds have sold off with the move in the US especially violent, though Australia has followed: The Aussie curve has steepened: And, giving us read of just how locally based Aussie weakness is, spreads to the US have widened: So, is it BTFB? Westpac thinks so: Its an important week for
The happy pills have soured at Martin Place: International Economic Conditions Members commenced their discussion of global economic conditions by noting that heightened policy uncertainty was affecting international trade and business investment. This had continued to be apparent in a range of indicators, including new export orders and investment intentions. Conditions in the manufacturing sector
Via the excellent Damien Boey at Credit Suisse: Our proprietary measure of the Australian credit impulse has picked up to 5.6% annualized in August, from 4.9% in July, and 4.6% in June. Importantly, the credit impulse is well off the lows we saw at the end of 2018. Indeed, the impulse is running at its
It’s never enough bubble for Joshy Recessionberg: The big four banks will be officially investigated for their repeated failures to pass on the full extent of central bank rate cuts to consumers under a government-launched probe into home-loan gouging. Josh Frydenberg has directed the Australian Competition & Consumer Commission to investigate the pricing of residential
There have been times when Chris Joye has made good sense. As well as times when he becomes property bubble obsessed. Sadly we’re back to the latter as he pushes Frydenberg’s mad house price bubble plan today: There is considerable value in the RBA demonstrating that QE means it has ample monetary policy ammunition left.
Via the excellent George Theranou at UBS: Based on our proprietary survey, our Q3 headline CPI forecast is unrevised at 0.4% q/q, slowing from Q2’s bounce to 0.6% (driven by petrol). This is partly due to retracement of fuel (-2.3%, -0.07%pts); while the UBS Evidence Lab Grocery Tracker has food up 0.7%. The y/y should
Via the AFR: Shayne Elliott, the chief executive of one of the country’s biggest banks, has called on federal Treasurer Josh Frydenberg to convene a summit to discuss the broader economic implications of zero per cent interest rates and quantitative easing. Mr Elliott, who is the CEO of ANZ Banking Group and chairman of the
First up, monetary curmudgeon and former RBA boffin, Stephen Grenville: So why would it be a bad idea for the Reserve Bank to undertake QE? To start with, it is unlikely to have much beneficial effect. America’s QE1, at the height of the 2008 financial crisis, was very effective because the Fed bought mortgage securities
From a new report by The BIS’s Committee on the Global Financial System which Phil Lowe chairs: Executive summary Central banks expanded their balance sheets on an unprecedented scale in response to the global financial crisis (GFC) and its aftermath. To address financial market dislocations and the limitations of interest rate policy as rates approached
It’s bid-o-rama for the bond rocket again today with yields at record lows across the curve: There has been virtually no curve steepening to speak of with inversion now out past the seven year: The spread to US has bottomed, I reckon, though I can’t see any great compression ahead: More boom to come unless
Via Moody’s: Next Recession May Lower 10-year Treasury Yield to Range of 0.5% to 1% Despite today’s ultra-low yields, Treasury bonds may still pay off handsomely once recession strikes. Accordingly, Treasury bond yields are likely to set new multi-decade and possibly new record lows within the next five years. Any claim that the U.S. Treasury
Apology withdrawn, Wayno, via Banking Day: Under the new structure, each of APRA’s six operating divisions will be led by an executive director, as announced yesterday by APRA chair Wayne Byres. Therese McCarthy Hockey, a 20-year career treasury professional, mostly at Deutsche Bank’s Australian and UK operations, has been appointed as executive director, banking. She
So says The Australian: Small business lending rates have barely fallen and those for credit cards have increased in the wake of three cuts in the official interest rate by the Reserve Bank to help spur economic growth. As the big four banks endure a political backlash for not fully passing on the RBA’s latest
Via The Australian comes the Gottiboff nightmare: In Sydney, the wealth management arm of global investment bank Citi reports a 50 per cent lift in “funds flow” out of Hong Kong and into Australia. Anthony Si, an investment specialist at Citi says, “high net worth clients view Australia as a safe haven during political unrest
Bring on the QE. We needed a low dollar policy in 2011 but we need it even more today. Yet, just as the RBA has finally turned sane, the Australian economic pet shop has gone mad. Leading the stupidity is the reliably useless AFR editorial: Keynesian economics was fond of motor metaphors. All that was
Via Goldman’s Andrew Boak who says that the RBA’s automated macro model, MARTIN (formerly known as a “ruler”), suggests that: “Most strikingly, the model suggests the RBA would need to implement a minus 1 per cent cash rate if it wants to achieve its unemployment and inflation goals over its 2-3 year forecast horizon. Assuming
Via Damien Boey at Credit Suisse: We model the slope of the real yield curve – the spread between 10-year inflation-indexed bond yields, and real 3-month interbank rates. We have demonstrated previously that the slope of the real yield curve can be reliably modelled as a function of four factors: Home-buying sentiment. The forward-looking components
At Domain: NAB followed CBA by saying it would cut rates for owner-occupiers and investors paying principal and interest by 0.15 percentage points. It will cut rates on interest-only loans for investors by 0.3 percentage points. As we said in our last quarterly report, interest-only loans have been so de-risked that they are now an
Via Bill Evans: As expected the RBA Board lowered the cash rate by 25 basis points at its October meeting to 0.75%. Westpac acknowledges that result given that we were the first forecaster to call the RBA cash rate below 1% (Bloomberg survey – May 24). Up until that time the 1% had been viewed as the
It’s all aboard the specufestor train now: In a move that is likely to influence other banks’ pricing, CBA on Tuesday said it would lower rates by 0.13 percentage points for all owner-occupiers and for property investors who are paying principal and interest on their loans. Property investors with interest-only loans will receive the full