Via the RBA just now: At its meeting today, the Board decided to lower the cash rate by 25 basis points to 0.75 per cent. While the outlook for the global economy remains reasonable, the risks are tilted to the downside. The US–China trade and technology disputes are affecting international trade flows and investment as businesses scale back
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.
The broken record screeches again: Australia’s inflation rate, at 1.6% (June quarter), remains well below the Reserve Bank of Australia’s official target range of 2-3%. The unemployment rate rose slightly to 5.3% in August, while real wage growth remains low at 0.7%. The RBA Shadow Board’s conviction that the cash rate should remain at the
Via Damien Boey at Credit Suisse today: Overnight, RBA Governor Lowe gave the strongest indication yet that the Bank is likely to cut rates when it next meets in early October. Notable arguments included: Australian rates being captive to global forces such as a global “saving glut” suppressing global rates, notwithstanding the flexibility of the
Via Bloomie: European Central Bank President Mario Draghi said the Governing Council should be open to ideas such as Modern Monetary Theory, while noting they’re closer to fiscal policy and should be directed by governments. …“These are objectively pretty new ideas,” Draghi said. “They have not been discussed by the Governing Council. We should look
The Australian dollar’s overnight bounce has eroded through the day as Trump impeachment fears fade: XJO is down modestly: Bonds are bid again: Dalian has flatlined: Big iron is weak: Big oil too: Big gold strong: Big banks are soft as rate cuts present mortgage book growth but falling margins: Big realty always likes the
The fasco-housing complex is running hard today at the AFR: Scott Morrison says Australia’s banks must not shy away from lending after the Hayne commission as he pushes back against what he calls an “instinctiveness” in society towards responsible lending standards that are too onerous. Speaking to the Australian American Association in New York, the
What will RBA QE look like? UBS has a go at it: The RBA thinks unconventional monetary policy is “unlikely”. But “If growth failed to pick up, and the unemployment rate started rising noticeably, then all arms of public policy would need to address how to combat that… in extremis, unconventional policy measures would need
Via Westpac: Having been “out of the money” with our October RBA call prior to last week, market pricing has now moved back to an 80% chance of our 25bp rate cut forecast being delivered. There were two main catalysts for the re-pricing. First was the Minutes of the RBA’s September Board meeting in which
Via Warwick McKibbin today: In recent weeks, Treasurer Josh Frydenberg has signalled his intent to endorse a new Statement on the Conduct of Monetary Policy. Typically, amendments to The Statement have occurred with a change in government or a change in Governor of the Reserve Bank of Australia (RBA). It is critically important that this
Via Bill Evans at Westpac: The minutes of the Reserve Bank Board’s September meeting contain similar themes to the August minutes but indicate that the Board acknowledges that it is getting closer to its next move on policy. In August the Board minutes concluded that: “Having eased monetary policy at the previous two meetings, the
A couple of standout lines from the RBA minutes are very dovish, including a clangor for Recessionberg: “Members noted that the outlook for the construction sector was particularly weak.” “The low- and middle-income tax offset (LMITO) was expected to boost household income, and thus support consumption growth, in coming quarters. However, the Bank’s liaison with
#RBA minutes on housing Despite Lowe talking about the risks of higher asset prices both the Bank & APRA are focused on credit growth so there will be no macroprudential until that space picks up materially (which is the risk) in the meantime property prices will rise sharply IMO pic.twitter.com/8oYNTlvpAF — Alex Joiner (@IFM_Economist) September
Fresh from the Loon: International Economic Conditions Members commenced their discussion of the global economy by noting that business conditions in the manufacturing sectors in many economies had remained subdued. They discussed the escalation of the US–China trade and technology disputes, which had intensified the downside risks to the global outlook. By contrast, conditions in
Alan Kohler climbs aboard the monetary helicopter today: QE involves printing money and buying government bonds from banks to give them cash. Why not just give the cash straight to the government? Presumably because central bankers don’t trust politicians, although why they would trust bankers more is a mystery. Anyway, fair enough, politicians are not
The corrupt Wayne Byers and his disgraced APRA have undertaken a new round of arse covering, from a speech Friday: APRA recently issued its four-year Corporate Plan for 2019-2023. In it, we called out four key outcomes we will be seeking to deliver for the Australian community: maintaining financial stability and resilience within the financial
Via Damien Boey at Credit Suisse: Overnight, ECB President Draghi launched his “bazooka” stimulus option – but markets experienced some highly counter-intuitive moves. Specifically, bond yields rose in response to the resumption of ECB quantitative easing, while the EUR/USD strengthened on ECB rate cuts. Equities responded favourably to these developments, although interestingly, momentum and bond
Via the excellent Damien Boey at Credit Suisse: With bond yields rising sharply, the Australian yield curve (10-year bond yield minus cash rate) is no longer inverted. Investors have started to price out further RBA rate cuts for this year, although the expectation remains for one more cut on the balance of probabilities. Connected with
Via Banking Day legend Ian Rogers: Hidden industry self-assessments must be published pronto and APRA must lean hard on banks to ensure that they are, scrutineer Graeme Samuel told a parliamentary hearing yesterday. Recalcitrant banks – including ANZ and Bendigo and Adelaide Bank and Macquarie Group – need a “reality check”, Samuel told the Standing Committee on
Via Martin North: APRA released their quarterly property exposures data to Jun 2019 today. We can see some of the moving parts in the Industry, though only at an aggregated levels. At the top level we can see the impact of APRA first imposing restrictions on investment lending in 2015, and later in 2017 on interest only
NAB now calling for three rate cuts over the next nine months: “Post the national accounts – not surprisingly – we have not materially changed our forecasts. That said, we are increasingly worried about downside risks. With tax cuts making little impact on consumer spending — and probably won’t in the near term — and
Via Damien Boey at Credit Suisse: Overnight, US 10-year bond yields surged by another 9bps. Over the past 5 days, bond yields have risen by almost 30bps. Catalysts for the bond sell off include reports of German fiscal stimulus in the pipeline, and a more conciliatory tone to US-China trade negotiations. We cannot also help
The bond bloodbath we’ve seen in the past week continued last night: The curve has steepened materially: And spreads to the US have narrowed: The question is: is it a turn or counter trend rally? It makes sense that yields rise as iron ore rebounds, house prices rebound and there’s hope abroad for Brexit and
More pressure today for Australia’s most corrupt regulator, Wayne Byers and his disastrous APRA, via Domain: Banking regulators may have to tighten lending standards sooner than expected amid fresh signs the Reserve Bank of Australia’s back-to-back interest rate cuts have enticed investors back into the property market. …ANZ economists Adelaide Timbrell and Felicity Emmett said
Nice work from the AFR today: Australian Prudential Regulation Authority chairman Wayne Byres and insurance expert Geoff Summerhayes spent over $100,000 on 11 business trips in the first six months of this year, at the same time as staff complained about the agency’s “shoe-string budget”. The pair made five trips to the picturesque Swiss cities
A new distraction is upon Australian macro management. It’s the Recessionberg versus Lunatic RBA circus. There’s lots of stories on it but the AFR captures the big yawn: Economist Richard Holden says the tension between fiscal and monetary policy is “Australia’s big economic dilemma”. …“Monetary policy cannot deliver medium-term growth,” Lowe told central bankers at
Via the excellent Damien Boey at Credit Suisse: Confusing growth outlook Investors are becoming more concerned about slowing growth. ISM surveys are pointing to stagnation, but not outright recession. Yet the temptation is to extrapolate a recession from a slowdown. Even though our mean forecast for activity growth is not negative, the fact is that