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.

5

Australian monthly inflation dies

We know it’s not real because the RBA says so. But if I were less of an intellectual pygmy, I might conclude that Australian inflation peaked a months ago and continued to trend down in November with another donut on the Melbourne Institute survey. Year on year is now plunging at 1.6%: Core inflation is

9

Captured APRA to muscle-up to banks (and deliver global peace)

So says a humiliated Wayne Byers, via Banking Day: A more frequent use of sanctions by APRA is on the cards, the regulator’s chair, Wayne Byres, told the banking royal commission yesterday. An afternoon of questioning of Byres was centred on themes of remuneration and bank culture and APRA practices in challenging boards over executive

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RBA warns on non-bank mortgage credit crunch

From Christopher Kent, Assistant Governor RBA (Financial Markets): Introduction Good afternoon, and thank you to the Australian Securitisation Forum for their invitation. It’s a pleasure to be here. Today I’ll provide an update on developments in the markets for housing and housing credit. These markets are closely related and both are of considerable interest to those

3

Oil price to fall further

Via Art Berman: Crude markets had a panic attack in August and September that sent prices soaring. Sanity is now returning. Prices have fallen but are likely to move even lower over the next few months. The panic attack was caused largely by Trump’s August 7 announcement that sanctions would be re-imposed on Iran. Anxiety

18

ANZ gives up on rate hikes

Via ANZ: We have revised our housing price forecasts. Sydney and Melbourne, in particular, have been downgraded. The fall in Sydney housing prices is already the largest in many years. Prices are now 9% below the June 2017 peak, a larger correction than in 2010-11, 2008, 2004-05, 1994-95 and, by the end of this month,

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RBA minutes howl rate hikes

RBA bulls in full charge: International Economic Conditions Members commenced their discussion of the global economy by noting that growth in Australia’s major trading partners had been robust in 2018. Growth was expected to ease a little over the subsequent two years, but to remain above potential in 2019. Although there had been little change

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McKibbin: RBA to blame for housing bubble and bust

At last MB and Professor Warwick McKibbin agree, from a nice piece by Adam Creighton: Guy Carson, chief investment officer at asset manager Quick Brown Fox in Sydney, warns that the bigger economic risk isn’t price falls but the volume of transactions. “The economic fallout from the stalling residential sector and falling house prices is

10

Friday Bloxo laugh

Haven’t seen the note. Don’t need to. Forexlive has the wrap: Labour market numbers for October showed that jobs growth remains robust and the labour market is tightening The unemployment rate held at the six-year low of 5.0%, with some states well below that level A tightening labour market should support a further lift in

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One reason to be very worried about Australia in the next global shock

We know all of the dry tinder. The big pile of external liabilities piled high in unproductive assets protected by the firebreak of public guarantees from a clean public sheet. But the next downturn could bring something that will set fire to all of this virtually overnight: Italexit. Via Albert Edwards, king bear: The orthodox

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RBA throws Guy Debelle under the Bernanke bus

From RBA deputy chair today: Assessing the Effects of Housing Lending Policy Measures Today I will summarise the Bank’s assessment of the various measures put in place to address the risks around housing lending. I will draw on Chapter 5 of the recent Financial Stability Review (FSR). I think it is important in terms of accountability that we

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ASX adds its warning that house prices are going crash

Gotti is onto it: The share markets’ danger signals are telling the Reserve Bank economists to leave their Martin Place bunker and go out into the real world. Go and talk to bank branch people (not CEOs) and learn how APRA rules are cutting bank lending by at least 20 over cent but usually by

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Is anyone factoring in the Chinese property bust?

Paging the RBA! Attention RBA! One of the less amusing features of the unwinding property cycle is the invisible Chinese dimension. This is becoming a serious issue. Indeed it’s possible that it the key driver of property price falls yet it is ignored and invisible. After all, the boom in Chinese inflows was ignored and

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Frydenberg panics, demands return of criminal mortgages

It would be amusing if it were not so horribly corrupt, via the AFR comes Amateur Treasurer Josh Frydenberg mainlining panic straight into bank executive veins: “I would encourage the banks when it comes to lending, in particular for small business, make sure you get the balance right, keep the books open and don’t lose

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Goooong!!! ANZ tolls bell on great Australian property crash

Oh boy. ANZ is preparing for tough times, via the AFR: …From November 25 the bank will be using new “comprehensive credit reporting” checks by having third-party agencies check on applicants’ credit card, home, personal, or car loan debt. In addition, mortgage brokers will be required to provide “enhanced verification” about applicants’ income and rental

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RBA SoMP chicken hawks it

The RBA Statement on Monetary Policy is out and has chicken hawked it (rather sensibly) not raising the outlook much if at all: It remains in Futureboom! high gear but some insight into how fragile this is comes with a special on labour market indicators: As an adjunct to monitoring each of these indicators separately, they

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Unquestionably weak: APRA lifts big banks capital requirements

Via Martin North: APRA has released a paper on Loss-Absorbing Capacity of ADI’s. It shows that currently major Australian banks are at the lower end of Total Capital compared with international peers. As a result of proposed changes, major banks (Domestic systemically important banks in Australia, D-SIBs) will see their funding costs rise – incrementally over

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Corrupt RBA and APRA politicised by bursting housing bubble

As we’ve observed before, there is nothing that the Reserve Bank of Australia and friends won’t do, no place they won’t go, to protect their pet housing bubble. On the surface the financial regulators appear to be happily deflating said bubble by pretending that the economic outlook is good, tightening macroprudential and holding interest rates

20

MB versus Martin

We can’t both be right. The RBA’s monthly statement yesterday was bizarrely bullish. Via Bill Evans: The themes that have become familiar in previous statements were repeated in this one: continuing global expansion; China slowing a little; international trade uncertainty; positive business conditions; household consumption a source of uncertainty; labour market outlook positive; wages growth