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.
From the excellent Damien Boey at Creit Suisse: We have just published a note explaining our positive view of the slope of the yield curve. This is a major change in view, after several years of curve flattening and inversion. Our thesis is as follows: Duration risk appetite is in overbought territory. From this starting
The state of debate in this country is appalling. The latest? The lunatic RBA has misread the economy for seven years, failed to deliver its inflation and employment mandate, helped trash five straight prime ministers by embedding a permanent income recession and what is the answer? Change the goal posts to protect it. Via the
Via BI: Citibank’s Australian economics and interest rate strategy team believe there’s a third option available to the RBA should the need arise: “helicopter money”, or printing money to be distributed to the public via the government. “Whilst on the experimental end we think it deserves serious consideration by the RBA,” said Paul Brennan, Josh
From Chris Joye late yesterday: Industry participants believe the central bank and banking regulator are considering a targeted alternative to a cut to the official cash rate, which would involve lowering the minimum 7.25 per cent interest rate banks use when assessing a home loan borrower’s repayment capacity by 50 basis points to 6.75 per cent. All
By Leith van Onselen Following last week’s crashing headline and underlying inflation over the March quarter: Roy Morgan has released its Inflation Expectations Index, which has plunged to levels not seen since late 2016: In March, Australians expected inflation of only 4% per year over the next two years. This is unchanged on February but
Via Alan Kohler on the weekend: As if reducing retirees’ incomes again is going to make any difference. Apart from anything else, the borrowers who theoretically benefit from a rate cut don’t reduce their repayments, so net incomes fall, not rise. Lopping another 1 per cent off interest rates might reignite the property market, and
Everybody is now forecasting imminent rate cuts: ANZ, NAB, WBC, MQG, CITI, CS, RBC, JPM, UBS, ME, TD, NOM, MB, bond and interest rate markets. Not Bloxo at HSBC or his mates at The Shadow: as the RBA has pointed out repeatedly, while the jobs market still has positive momentum, which is still the case,
The Deflation Bank of Australia faces a conundrum, via The Australian: The RBA is facing up to the reality that a review of its economic forecasts on May 10 will include cuts to both its GDP growth and inflation forecasts, sharply eroding any optimism it might retain about the economic outlook. Still, the impact on
By Leith van Onselen The Australian Bureau of Statistics (ABS) has released the Consumer Price Index (CPI) data for the March quarter 0f 2019, which registered plummeting headline and underlying inflation on weakening domestic demand. According to the ABS, headline CPI was flat (0% growth) in the March quarter, 0.5% below the December quarter’s 0.5%:
Via Banking Day: While there have been plenty of lenders dropping fixed rates in recent months, few have cut their variable rates. That changed last week when ANZ, AMP Bank and Bendigo and Adelaide Bank bucked the trend. ANZ cut the discount on its Simplicity Plus principal and interest rate for new loans with loan
Via Westpac: • Westpac’s forecast for the March quarter CPI is 0.1%qtr with the annual pace easing back to 1.4%yr from 1.8%yr. • The March quarter is a seasonally soft quarter with the ABS projecting a seasonal factor of +0.2ppt. The seasonally adjusted CPI is forecast to rise 0.3%. • Core inflation is forecast to
It certainly got overbought as we know, via Credit Suisse: And yields have been rising now for few weeks: The curve has also steepened a little: Though spreads to the US have not really compressed much at all: I still expect the Aussie economy to be dragged into the housing bust throughout H2 and the RBA
Via the excellent Damien Boey at Credit Suisse: We think that the RBA will cut rates, probably in 2H. For further discussion of this view, please see our recent article “Can you feel the tension at the RBA” dated 20 March 2019. But we also think that officials are thinking about monetary policy with reference
Dovish RBA minutes out just now: International Economic Conditions Members commenced their discussion by noting that the slower pace of global economic activity had continued in recent months. This had been particularly evident in the manufacturing sector. Survey measures of conditions in the manufacturing sector had declined across a range of economies, although they had
CLSA’s excellent Brian Johnston is on the money here: Veteran CLSA bank analyst Brian Johnson said while funding costs had fallen, margins were still under pressure due to increased costs as investors coming to the end of their interest-only periods are forced to switch mortgage products to pay off both the principal and interest. Switching
The new RBA Financial Stability Review is out and brimming with anxiety: Risks to the household sector have increased over the past six months given weak housing market conditions. Housing prices have fallen significantly in Sydney and Melbourne after the earlier large run-up in prices, while in Perth and other miningexposed regions, prices have been
Via the excellent Damien Boey at Credit Suisse: In recent times, we have seen a number of central bankers attempt to jawbone the yield curve steeper, or at least, downplay the significance of flat-to-inverted curves. And all have failed: RBA Deputy Governor Debelle suggested that 10-year bond yields are artificially low relative to terminal rate
Because what Australia needs is more deflation! DXY eased last night as EUR rose: AUD launched against DMs: But was mercifully weaker than EMs: Gold tacked on gains: Oil is parabolic: Metals are still soft: Miners too: EM stocks ground higher: US junk jumped: As Treasuries were bought: Bunds too: The lunatic RBA has killed
We’ve seen suicide bombings by Ian Harper, Phil Lowe, Christopher Kent, Michelle Bullock, Luci Ellis and today it is Guy Debelle: Thank you very much to AmCham for giving me the opportunity to speak in my home town of Adelaide. Today I am going to discuss the Bank’s assessment of the current economic situation both in
Via The Australian: O’Sullivan’s commission could do irreparable damage to the financial system. Everybody’s job, everybody’s mortgage, every loan to every business in the country was dependent on the strength and credibility of the financial system, they said, and O’Sullivan was about to lift the lid on a Pandora’s box. With the help of a
Via the AFR comes the IMF in an unusual break with the tradition of agreeing with whatever the locals say: Australia’s housing market contraction is worse than first thought, says a top IMF analyst, leaving the economy in what he called a “delicate situation” that boosts the need for faster infrastructure spending and even potential interest
On Tuesday we noted a significant change in the Statement by the Reserve Bank Governor: “Our research showed that there has been a very significant change in the Governor’s Statement for this month. Recall that Governor Lowe has not changed monetary policy since he became Governor in September 2016. Also note that the key concluding
Via UBS: Implications: smaller than expected stimulus raises risk of early/more RBA cuts Overall, as we flagged, the Budget improved modestly due to higher commodities & fiscal conservatism, with the surplus profile supporting the AAA. Household tax cuts & handouts were much smaller than expected; while infrastructure & public demand slow sharply. With credit tightening