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.

13

Ukraine Lehman moment builds around commodities

This is some monetary egghead stuff but it is very important. TD Securities: US Funding Stress: Ripples in the Water •Bank unsecured funding levels have risen amid the financial reverberations of the Ukraine invasion. CP-OIS, Libor-OIS, and cross-currency basis have all widened. However, we argue that this is more a function of markets pricing in

12

Dovish RBA sings its tune

A still dovish RBA: At its meeting today, the Board decided to maintain the cash rate target at 10 basis points and the interest rate on Exchange Settlement balances at zero per cent. The global economy is continuing to recover from the pandemic. However, the war in Ukraine is a major new source of uncertainty. Inflation in

40

Aussie households have never been this exposed to rate hikes

Financial comparison site Canstar compared the cost of mortgage repayments for those who bought median priced houses in each of Australia’s capital cities in January 2021 versus January 2022, assuming a principal and interest 30-year loan and a 20% deposit. Despite the ongoing fall in variable mortgage rates over that time (see above chart), the

4

Albert Edwards: Deflation shock cometh

Iceman Albert Edwards of Societe Generale with the note. —- Are inflation fears set to evaporate as economic growth slumps?  Putting to one side the geopolitical uncertainties of the disturbing events in the Ukraine, the immediate impact of a further strengthening of commodity prices (particularly food and energy) caused by the invasion will, at

4

Is Aussie wage growth stronger than reported?

As we know, Wednesday’s wage price index (WPI) disappointed expectations, recording only 2.3% annual growth in the 2021 calendar year: With the RBA seeking wage growth in excess of 3.0%, this soft result all but squashed the notion that the RBA would lift the cash rate by mid-year. Yesterday, the ABS release average weekly earnings

3

Aussie wage growth lags RBA’s expectations

Australian wage growth missed the RBA’s expectations in the December quarter of 2021, according to new data released today by the Australian Bureau of Statistics (ABS). Total wages grew by only 0.65% in the December quarter, largely meeting analyst’s expectations of 0.7% growth. Private sector wages grew by 0.66% over the quarter, whereas public sector

0

Aussie inflation expectations push 7-year high

Roy Morgan Research has released its inflation expectations survey for January, which hit its highest level since late 2014: In January 2022 Australians expected inflation of 4.9% annually over the next two years, up 0.1% points from December 2021. The level of Inflation Expectations in January equals the seven-year high reached in November 2021 –

53

Either interest rate markets are wrong or house prices are going to crash

According to interest rate markets, the RBA is about to engineer a house price crash the likes of which Australia has not seen over a century. Via Westpac, here is the outlook for interest rates: According to rate forwards, Australia and NZ will have the highest cash rates in the developed world at 2% within

3

Aussie inflation expectations hit 7-year high

ANZ-Roy Morgan has released its weekly inflation expectations survey, which rose 0.2% back to its seven year high of 5.0%: This follows Roy Morgan’s survey earlier this month, which also showed inflation expectations tracking near 5% over the next two years: Higher petrol prices and supply chain bottlenecks are clearly having an impact. Nevertheless, the

21

Exclusive Minack: Immigration “wage suppression” determines rates

Exclusively from Gerard Minack’s Downunder Daily:  —————– Can Australia escape its horrendum decennium? The pandemic hit an Australian economy in startingly bad shape.  Ironically the pandemic has provided a circuit-breaker: fiscal policy kick-started growth and border restrictions are tightening the labour market.  It seems likely that the RBA will start tightening policy this year.  But the outlook beyond that

4

How high will interest rates go?

Interest rates are on the march around the world. How high will they get? Markets are pricing a terminal cash rate in the US at about 2%. The Fed is slightly higher. I don’t believe either. One reason why is that the Treasury curve is already collapsing at speed before the Fed has raised at

32

Captain Lowe cool as a cucumber

Finally, there is an RBA that is making good sense. The following are Governor Phil Lowe’s prepared remarks for Parliament, which has taken a brief break from sectarian sleaze cult meltdown for a bit of monetary relief: Good morning. My colleagues and I look forward to the day where we can return to in-person hearings.

12

Why the bullhawks are wrong again

Chris Joye with the note: To be clear, our October 2021 property price forecasts remain unchanged. Cheap money gave us capital gains worth 26 per cent since their September 2020 nadir, which is in line with the 20-30 per cent we had been looking for. Reduced purchasing power will take some of this away. Mitigants

3

Phil Lowe hoses the interest rate hawks (again)

RBA Governor, Phil Lowe, addressed the National Press Club yesterday, whereby he reiterated that the official cash rate will likely remain on hold until next year. While the RBA admitted that the economy has performed “significantly better” than the Bank forecast: And the RBA has lowered its unemployment forecast “to around 3¾ per cent by

5

Aussie inflation expectations fall

After six straight months of rises, Aussie inflation expectations fell in December, according to Roy Morgan: In December 2021 Australians expected inflation of 4.8% annually over the next two years, down 0.1% points from the seven-year high reached in November 2021. The small decline ended a record six straight months of increases from June –

14

RBA shoots down the bullhawks

As expected: At its meeting today, the Board decided to maintain the cash rate target at 10 basis points and the interest rate on Exchange Settlement balances at zero per cent. It also decided to cease further purchases under the bond purchase program, with the final purchases to take place on 10 February. The Omicron outbreak has affected