Last night was bank carnage on global bourses. European banks were slaughtered: As funding markets lock up: US banks fell 11%: As funding markets lock up: And Aussie bank CDS has begun its inevitable climb, up by nearly half yesterday: Funding markets are already locked up. Pricing will take a few days to catch up.
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.
BofAML has nice wrap on deteriorating credit markets via Zero Hedge: [JPM strategist] Panigirtzoglou starts off by pointing out that the “supply chain disruptions and the demand shock caused by the COVID-19 crisis are likely already creating cash flow problems for certain businesses in particular smaller companies and those belonging to sectors most affected by
More like Joye wrong: It says a tremendous amount about the mental agility of Martin Place, and its outstanding board, that they were able to swing 180 degrees to lead the world with a quarter-percentage point cut on Tuesday. It was one of Phil Lowe’s finest hours, accented by gushing praise in a tweet from
Via Credit Suisse’s monetary wizard, Zoltan Pozsar: Today’s liquidity conditions are like the waters receding before a giant wave. The coronavirus outbreak and the shock that preventative measures introduced to manufacturing and services activity will lead to missed payments globally. Missed payments will force more and more firms to become deficit agents; as this cascades,
Via The Australian: Australian fund manager Perpetual has sought to sooth investor nerves after its $500 million listed corporate debt trust was hit by an 8 per cent share sell-off amid a blow-out on junk bond markets. Kristy Bradley, a client manager at Perpetual Investment Management, on Wednesday told shareholders in the company’s Credit Income
It’s got a small, open, export-dependent economy but what does the RBA do? Brings a spoon to the forex bazooka fight every time it is needed. Yesterday’s 25bps was clearly too small and there was no mention of unconventional policy even though we will run out of rate cuts in one month. That’s not just
The virus is going to pass and the climb towards full employment resume. Except this: Mortality rate is exaggerated owing to poor testing: Italy and Iran now toxic: All of Europe in the brown. US to follow: Thanks for nuthin’ China: Still a winter infection and we’re headed into it: Today’s laugh comes from China
Fresh from the loon: At its meeting today, the Board decided to lower the cash rate by 25 basis points to 0.50 per cent. The Board took this decision to support the economy as it responds to the global coronavirus outbreak. The coronavirus has clouded the near-term outlook for the global economy and means that global growth in
Via Bloomie, bring it on: Prolonged equity losses and monetary easing by the Reserve Bank of Australia can send the nation’s 10-year bond yield into negative terrain for the first time, according to Craig Vardy, head of fixed income for Australia at the world’s biggest money manager. …Quantitative easing may be implemented in the fourth
It’s worth revisiting. All last week pointed to the bizarre pricing of rate cut odds in Australia and the strange calm in bond markets. Friday night both came apart in spectacular fashion: All yields are at record lows: The curve is inverted past the ten year, screaming at the RBA to slash rates: But, alas,
The Shadow RBA is out with its usual hawkish preening today: Covid-19, Weak Wages Growth, and Persistently Low Inflation: Cash Rate Should Remain Steady, Just Fear about a global coronavirus pandemic are already taking their toll on world financial markets and are likely to impose significant economic costs on the Australian economy, should the crisis
The entire interest rate community in Australia is caught so far behind the curve it is shocking. COVID-19 is loose worldwide with cases doubling every four days and describing a classic parabolic curve. At the current rate of infection, by the April RBA meeting there will 3.3m infected. If left unchecked, by the May meeting
Via Moody’s: Fed Rate Cuts May Fall Short of Stabilizing Markets Markets are trying to “price-in” an event for which there is no readily known precedent. Volatility will rule until COVID-19-related risks reverse course. Since COVID-19 first pressured U.S. equities following January 17’s close, the market value of U.S. common stock as measured by the
The hilarious mispricing of everything continues. According to rates markets there is now a full 11% chance of an RBA cut next tuesday: Are markets, the RBA or both really that stupid? Despite this, the 10 year yield has sunk to all-time lows today: Even so, the curve has been steepening recently which must go
Via FTAlphaville: Amid the border closures and flight cancellations, comes one trip that — were it not for the coronavirus — might never have happened. The money helicopter has arrived. Via the South China Morning Post: Hong Kong permanent residents aged 18 and above will each receive a cash handout of HK$10,000 (US$1,200) in a HK$120 billion
Via Bloomie: The global credit machine is grinding to a halt. The $2.6 trillion international bond market, where the world’s biggest companies raise money to fund everything from acquisitions to factory upgrades, came to a virtual standstill as the coronavirus spreads fear through company boardrooms. In the U.S., Wall Street banks recorded their third straight
Capital Economics still looking at April: …we don’t think that the RBA’s concerns about financial stability are an insurmountable hurdle …housing finance commitments have rebounded…consistent with housing credit growth remaining very subdued …we think it may fall to US$0.65 by the end of the year The RBA must cut next week. First, COVID-19 is no
There are five reasons why Phil Lowe should get boned. First, after a near decade of failed forecasting at the bank, the Lowe RBA is still resolutely projecting imminent rebounds for wages and inflation. Second, the Lowe RBA refuses to use underemployment as its key labour market measure over unemployment, when it is the former
First up is George Tharenou at UBS: The Jan labour report was materially weaker: y/y jobs slowed to the worst since Apr-17, hours dropped 0.4% m/m, underutilisation spiked to the highest since Apr-18, & unemployment lifted 21bps (the largest m/m rise since Jan-16), to the equal highest since May-18 – all before the significant impact
Who can forget this absolute public policy shocker by the RBA: Ready for round eight? In it’s most recent Statement, the RBA noted: Wages growth was broadly as expected in the September quarter. The majority of firms in the liaison program continue to expect little change in wages growth over the next year, and only
Via the excellent Damien Boey at Credit Suisse: We have updated our proprietary wage inflation tracker for the latest partial indicators – and the results suggest that we should look forward to 2% annualized wage inflation in the coming quarters – well short of the RBA’s desired 2.5% annualized. Key components of our wage tracker
Via Bill Evans at Westpac: The minutes of the February Reserve Bank Board meeting do not provide much further information than we have seen from other communication from the Reserve Bank in recent weeks including the Governor’s speech to the National Press Club; the Statement on Monetary Policy; and the Parliamentary testimony. Key to the
Perhaps freshly off the blower with Highrise Harry, Gottiboff explores some COVID-19 scenarios today. If it is stopped he says: …On the weekend I was yarning with a Hong Kong resident who has temporality switched his base to Australia. He tells me the coronavirus is far more destabilising than the riots and a great many