From the RBA just now: At its meeting today, the Board decided on a package of further measures to support job creation and the recovery of the Australian economy from the pandemic. With Australia facing a period of high unemployment, the Reserve Bank is committed to doing what it can to support the creation of
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.
Via Morgan Stanley: …investors were a bit too complacent on the uncertainty surrounding the election outcome, unlikely passage of a fiscal stimulus before the election and second wave of Covid-19…the short answer is that the worst of the correction is over in our view but we still think the next month is likely to remain
Some relatively sensible whinging about QE from the boffins today. First, Adam Creighton: Prosperity is never the gift of either fiscal or monetary policy and its supposedly wise practitioners. It’s a consequence of technological progress and more efficient allocation of resources. On the former, we’re hostage to fortune. On the latter, we need much more:
Via Bill Evans at Westpac: The Reserve Bank Board meets next week on November 3. The Bank will also release its November Statement on Monetary Policy on November 6 where it will provide detailed colour around the policy decisions and print its revised growth forecasts. The Bank has not updated its forecasts since August 7.
Via The Shadow: With Victoria successfully containing the corona virus and lifting stage 4 restrictions, Australia’s overall Covid-19 statistics (infection numbers and death rates) look comparatively benign. The inflation rate, based on the latest ABS CPI estimate, has returned to positive territory, equalling 0.7% year-on-year in the September quarter (after equalling -0.3% year-on-year in the
The AFR has finally discovered a somewhat more balanced debate about imminent RBA quantitative easing but it has more work to do. On the weekend, the usual suspects had a good whinge: “Further rate cuts would be counter productive to the economy,” Professor McKibbin said, “Why keep cutting rates when we know it does nothing
Via the AFR: ANZ CEO Shayne Elliott has warned the Reserve Bank that its expected interest rate cuts will further drown the financial system in liquidity, hitting bank profits by squeezing margins but doing next to nothing to stimulate the economy and jobs. Mr Elliott said he wasn’t sure what problem further easing would solve
Via The Australian: The Reserve Bank of Australia has scope to ease monetary policy settings further if it wants, and any suggestion that its firepower has run out can be dismissed, Ian Harper, a member of the central bank’s policy-setting board, told the Wall Street Journal. “There is certainly capacity for the Reserve Bank to
From Gareth Aird, Head of Australian Economics at CBA: Key Points: We expect the RBA to ease monetary policy at the November Board meeting and we expect a suite of measures to be announced. We expect the RBA will lower the cash rate target, lower the target on the 3-yearAustralian Government bond yield and lower
From CBA’s head of Australian economics, Gareth Aird: We expect the headline CPI to increase by 1.4% in Q320 (+0.5%/yr). The trimmed mean CPI on our forecasts will print at +0.4% (+1.2%/yr). Recent communication from the RBA means that more policy easing is imminent and we expect it to be delivered at the November Board
Via FTAlphaville: MMT is a theory that people love to love, and love to hate. The idea, which stands for Modern Monetary Theory, is frequently cited by academics and politicians on the left as evidence that the state has further capacity to spend without serious consequences to the economy (yet!). On the right, meanwhile, it’s
In his recent Lowy Institute commentary, RBA alumnus John Edwards demanded MOAR: Just as the Australian government has little choice but to continue for some time with the expansionary fiscal stance it adopted in response to the pandemic, so too the RBA has little choice but to continue its expansionary monetary stance. In the RBA’s
From Roy Morgan Research: In September Australians expected inflation of 3.3% annually over the next two years, up 0.1% points on the record low in August. However, Inflation Expectations are still down a significant 0.7% points on the pre-pandemic month of March 2020… Inflation Expectations have fallen significantly for all Australians during the pandemic, down
More monetary drivel from the AFR yesterday: Considerations on the strength of the Australian dollar and the significant drag on the economy because of Victoria’s lockdown were two key factors that influenced decisions on further monetary easing bias, the minutes reveal. In the September minutes the RBA said: Members recognised that the substantial, coordinated and
Via Bill Evans at Westpac: The Minutes of the October Board meeting of the Reserve Bank of Australia confirm the key themes of Governor Lowe’s speech which was delivered on October 15. They indicate that the Board had effectively decided to ease policy at the October meeting. One reason for delaying the announcement would have
Finally, ten years late, we are in the global monetary and currency game: The Stance of Monetary Policy in a World of Numerous Tools Christopher Kent[*] Assistant Governor (Financial Markets) Address to the IFR Australia DCM Roundtable Webinar Online – 20 October 2020 Introduction In a world of unconventional policies, assessing the stance of monetary policy is
Back in 2016, Australian economics titan, Tim Toohey, forecast a new Australian boom: Goldman Sachs has upgraded its Australian dollar and economic growth forecasts. “As we look out to 2017 and beyond, we believe Australia has moved through an important transition point and with it has emerged the prospect of stronger and less volatile real
Last week I offered a few suggestions to Australia’s league of failing economists in the hope that some might escape the mediocrity of debate that is holding the nation back. Paramount was that they should avoid the Australian Financial Review because, frankly, it has no idea what it is talking about when it comes to
From Westpac chief economist Bill Evans: I had expected that the events this week would be highlighted by the stunning 11.9% surge in the Westpac-Melbourne Institute Consumer Sentiment Index. That was not the case. RBA Governor Lowe delivered a speech on Thursday to a Banking Conference that was, quite simply, a game changer from the
The RBA has finally made it to where it should have been ten years ago: Turning to the broader policy question, we have been considering what more we can do to support jobs, incomes and businesses in Australia to help build that important road to the recovery. The options have been laid out in previous
Via the excellent George Tharenou at UBS: RBA Lowe changes CPI target to actual (not forecast) inflation RBA Governor Lowe’s speech initially reiterated their forward guidance to “not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent
It’s the same every time we face this question. The same tired people. The same reactionary arguments. The same lack of imagination. All have resisted rate cuts for years, been wrong the entire time about it, yet they never let up nor learn. At the AFR: “Compared to prior downturns, the recovery in consumer sentiment
They are finally, slowly, catching up. Phil Lowe has just mooted the bank shifting its QE purchases out the bond curve as far the 10 year with predictable results for yields which have all crashed this morning. The result is that spread to US yields is also tightening: The curve is flattening as well: This
Via Deflation Phil just now: The Recovery from a Very Uneven Recession Philip Lowe[*] Governor Citi’s 12th Annual Australia and New Zealand Investment Conference Sydney – 15 October 2020 It is a great pleasure to be able to join you today. It is especially good to be able to join you in person, rather than over the
WTF is this world that we are living in! Via the AFR: Treasurer Josh Frydenberg has strongly resisted suggestions to embrace so-called modern monetary theory (MMT), whereby governments force central banks to print money to fund fiscal expenditure. …”I never thought as a Liberal Treasurer that I would be here with the highest deficit and
Via the AFR comes a second sane dude today: The Reserve Bank’s recasting of the narrative on quantitative easing is part of a pattern of backflipping on policy statements, says bond fund manager Charlie Jamieson, that he and the market agree will lead to a rate cut on Melbourne Cup day. “The RBA are a
Via Credit Suisse: While we had previously looked to fade backups in rates ahead of the election — given our expectation for fiscal stimulus discussions to remain stuck, corporate supply to taper off, and the Fed to keep conditions accommodative — the meaningful change to the election calculus overwhelms these considerations and suggests leaning short
Via Bill Evans at Westpac: RBA more dovish than September; setting the scene for a further rate cut next month. As expected, the Reserve Bank Board decided to hold policy steady at its October Board meeting. However, from our perspective, there is considerable encouragement that the Board plans to move next month having given the