Via UBS: Are the major banks setting RBA monetary policy? The Australian monetary policy regime is shifting. Historically, the almost single driver of monetary policy settings in Australia was the RBA’s cash rate. Indeed, there used to be a very strong causality of RBA cash rate moves with borrowing rates. With 85-90% of mortgages on
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 Macquarie: We estimate that out-of-cycle interest rate hikes announced over the last 12 months reduced overall households’ incomes by ~$5bn. Furthermore a gradual shift from IO to P&I would take off additional $5-10bn from discretionary incomes or savings. However, given the distribution of debt, we estimate that ~60% of the reduction in discretionary incomes
From the RBA Shadow today: Australia’s economic outlook remains mixed. The unemployment rate unexpectedly fell to 5.5%, while headline inflation remains well contained. On the other hand, household debt continues to break new records, raising concerns about a possible housing crash in the major capital cities. The RBA Shadow Board continues to advocate a hold-and-wait
From Australian Broker: ME today announced several changes across its home loan portfolio. The Bank will decrease by 10 basis points its principal-and-interest variable home loan offer to new owner-occupier borrowers who are applying for a loan in a member package valued at $150,000 or more and with an LVR at 80% or less. It
From Bloxo today following his mentor Mr Rainbow: RBA tactics and commentary The improvement in the local labour market and business conditions as well as improving global economic conditions and a recent shift in rhetoric at other central banks will all act to re-affirm the RBA’s view that it will not need to cut the
Mr Rainbow is on the run at the New Daily: A widely-misreported warning of eight rate hikes in two years would in fact be good news for the economy, according to the man who made the prediction. Dr John Edwards, former economic advisor to Paul Keating, former RBA board member and former chief economist at HSBC, struck fear
What’s so cheered central bankers worldwide in recent days? NAB asks: “Why have central banks become hawkish all of a sudden?” The link between monetary policy and the real economy is working The link between a growing real economy and inflation is more subdued than in the past, but the factors holding this back are
A speech from Wayne Byers yesterday certainly sets such up (cut to the end for the money quote): WAYNE BYRES Chairman The American Chamber of Commerce in Australia Business Briefing, Sydney 28 June 2017 Thank you for the invitation to speak this afternoon. I intend to talk today about international standards and national interests.1 The intersection
John Edwards AKA Mr Rainbow is back: Shrugging off slow first quarter growth in the US economy, the Federal Reserve increased its policy interest rate earlier this month, and intends to do more. Not long after, minutes of a meeting of the Bank of England’s Monetary Policy Committee surprised markets by revealing that three of
Via Banking Day: Westpac has swung the axe on a range of alternative mortgages marketed by its Bank of Melbourne and Bank SA subsidiaries. In identically worded memos sent to mortgage brokers on Tuesday, BoM and Bank SA announced that their fixed and variable rate low doc home loans would be withdrawn from sale on
The rarely useful Elizabeth Knight put her finger on something over the weekend: There is a hidden and worrying risk lurking for a particular set of mortgage borrowers, whose level of financial stress is about to get a whole lot worse. It’s those home owners with interest-only loans that are now increasingly under the pump
From NAB: NAB has today announced changes to its variable home loan interest rates, effective Friday 30 June 2017. The following three changes have been announced: The interest rate for owner occupiers making principal and interest repayments will decrease by 0.08% per annum, to 5.24% per annum The interest rate for owner occupiers making interest
A fading China, downgrades, levies, housing bubbles and no growth. Why would you own an Aussie bank? UBS see more to come: South Australia hits the banks with a further State Bank Levy In today’s South Australian budget, Treasurer Tom Koutsantonis announced it will be introducing a state based Bank Levy on the Major banks
The conniption begins, from Chanticleer: Bad policy clearly breeds bad policy, as shown by South Australia’s $370 million tax on the big four banks and Macquarie Group. But South Australian Treasurer Tom Koutsantonis has created a problem for himself by aligning his “super profits” tax on the banks with the state’s share of the national
From Bloxo yesterday: …reading the economy recently has also required an expert eye. This is because many of the indicators we typically look at have been affected by the weather, or measurement issues, or both. Cyclone Debbie, which struck Queensland in late March, and unusually wet weather on the eastern seaboard, including the wettest March
This is turning into a smash: Effective on 30 June 2017, Westpac will reduce its variable rate interest rates for customers paying principal and interest on their owner occupier home loans by 8 basis points to 5.24% per annum (comparison rate 5.38% per annum*). Westpac will also adjust interest only rates for variable home loans
It should, via Bloomie: …announcement in coming days from the Australian Prudential Regulatory Authority, which is due to say whether it will require the banks to hold more capital against their mortgage books as part of a wider update on capital requirements. Despite recent steps to rein in their exposure to the riskier areas of
From AMP: The pricing and policy changes for investment property loans, include: Variable interest rates for new and existing investment property loans will increase by 35 basis points For all new investor property loans, the maximum loan-to-value ratio (LVR) is reducing to 50%. This change applies to all new loans with an investment property as
I honestly don’t know what happens to these RBA guys when they walk through the door at Martin Place: The nation’s labour market is close to the point when workers who are keen for jobs or more work are absorbed into a strengthening economy, stoking the wage inflation that is a key precondition for future interest rate hikes,
From Phil Lowe today 2017 Crawford Australian Leadership Forum: Global Realities, Domestic Choices: Responding to a Digitalising, Deglobalising, Post-truth world: The central issue is: where does the future growth in the global and Australian economy come from? There are four points that I would like to make. For a while, growth can come from a cyclical upswing
At the AFR: The most dramatic three-month surge in job creation in 12 years is stoking speculation the long post-boom era of sluggish wages growth, which has helped support hiring at a time of falling national income, will eventually near its end. Former Reserve Bank board member Warwick McKibbin said the figures confirm that official
For a great reflation and “boncano” it sure looks more like a great deflation! The US bond curve is getting smashed flat as Fed hikes outpace inflation expectations: Of course we already know that the Chinese curve has fully inverted for the first time: And the Aussie curve is under a lot of pressure now
Via Macquarie today: Rations are getting smaller In our view, housing lending credit standards are continuing to tighten as banks are responding to the macro prudential requirements and buffers imposed by the regulator. We believe these changes are likely to result in ongoing pressure on the outlook for banks’ volume growth. Furthermore, we see risks
From Bloxo: An influential survey – watched closely by the Reserve Bank of Australia – which showed businesses have just enjoyed the best month since the 2008 global financial crisis may be giving a more accurate reading of how the economy is doing than last week’s weather-blighted GDP report. While many economists have been downbeat