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.

27

APRA hikes bank capital

As expected: This Information Paper sets out the Australian Prudential Regulation Authority’s (APRA’s) conclusions with respect to the quantum of additional capital that might reasonably be expected to be required for the Australian banking sector to have capital ratios that are considered ‘unquestionably strong’. Reflecting the social and economic cost of the global financial crisis,

16

McKibbin turns inflatonista

Via the AFR: In what would be a radical departure from a system that has served since the mid-1990s to curb the rampant inflation of an earlier generation, Professor Mckibbin argues strict inflation targeting has run its course as credible policy making tool. “Inflation has been a good intermediate step because it tied down price expectations

10

Bill Evans hoses RBA hawks

From Bill Evans at Westpac: The most important result from the minutes of the monetary policy meeting of the RBA Board was to finally nominate the Bank’s estimate of the “new neutral real interest rate for Australia”. In other countries it has been recognised for some time that the neutral rate has fallen particularly since

14

Brace for Amazon deflation

Via UBS: What will be the economic impact of Amazon? The expected arrival of Amazon in Australia in late-18 will challenge many retailers (see Q-series). Given retail is Australia’s 2nd largest employer, it will probably have enough impact to influence the broader economy. Overall we find total jobs growth may be marginally slower than otherwise,

11

I dare you, RBA, hike rates

Via the AFR today: While the conventional view, particularly among the big four banks, is that the Reserve Bank is firmly on hold this year and through most of 2018, Goldman Sachs Australia chief economist Andrew Boak believes the economy could weather a stronger currency following an official rate increase. “It’s hard to find too

3

Will happy business or sad consumers drive the RBA?

Via Deutsche: Business surveys versus consumer surveys The NAB business survey for June shows business conditions at their highest level since 2008. In contrast the July consumer sentiment data shows conditions around long-run average levels (with that long run average including a deep recession). As Figure 1 shows, the ‘gap’ between the two is stark

0

More forecasts of Australia decoupling from global growth

From PIMCO’s Robert Mead: After 25 years of steady economic growth, Australia is on the verge of wresting bragging rights from the Netherlands for the longest period on record without a recession. While this historic event should be celebrated, the future may not be as rosy. PIMCO’s base case calls for Australia to keep growing

7

We’re all bond bears now

Ray Dalio is: Central Banks’ Reversals Signal the End of One Era and the Beginning of Another For the last nine years, central banks drove interest rates to nil and pumped money into the system creating favorable carries and abundant cash. These actions pushed up asset prices, drove nominal interest rates below nominal growth rates,

19

Banks tighten spigot on equity mate

Via the AFR: AMP, the nation’s largest financial services group, is banning property buyers using their mortgage as a “piggy bank” for personal spending, escalating lenders’ response to regulatory pressure to rein-in ballooning household debt. It follows Commonwealth Bank of Australia’s decision to crack down on issuing credit cards to property borrowers, also a response

20

No more rainbows for RBA

Via WSJ comes the RBA’s Ian Harper: We’re on target, but to be blunt there is also plenty of evidence that you wouldn’t want to rush this (raising rates).” “There is still plenty of underemployment” and “it is not clear that inflation is rising” “We are not calling the economy dead. Things are recovering nicely.

2

Mystery buyer plunges on Aussie bonds

Via Domainfax: A single buyer snapped up all $800 million of Australian government bonds sold on Wednesday, the largest ever amount bought by one bidder in auctions that date back to 1982. The sale of a nominal bond to just one entity hasn’t happened since August 2013, according to data from the Australian Office of Financial

5

Have interest rates bottomed?

Via the AFR: A minority group of economists have dumped their forecasts that the Reserve Bank of Australia will cut official interest rates again as the global central banking tide begins to change direction. Su-Lin Ong, a seasoned economist at RBC Capital Markets, is the latest to join the shift, saying on Wednesday she now

0

Westpac on the RBA

From Matthew Hassan: As widely expected, the RBA left the official cash rate unchanged at 1.50% at its July meeting. The Governor’s decision statement was also largely the same as in June with no substantive changes to the key closing paragraphs and other tweaks mostly minor and even-handed in terms of policy implications. Indeed, there

15

RBA remains firmly in neutral

The RBA statement: At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent. The broad-based pick-up in the global economy is continuing. Labour markets have tightened further in many countries and forecasts for global growth have been revised up since last year. Above-trend growth is expected in a number of

21

Bendigo rides in with triple rate hike for interest-only

From Bendigo: Managing director Mike Hirst said the changes reflect the requirement to meet the regulator’s expectations while responding to the ultra-competitive owner occupied mortgage pricing market for new lending. “When setting interest rates our bank needs to consider many factors and carefully take into account the needs of our stakeholders including customers, shareholders, staff,