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.

9

Ellerston: RBA gunna cut

Some more heavy hitters join the MB outlook today, via the AFR: Ellerston Capital’s head of global macro, Brett Gillespie, believes there is a solid chance that the Reserve Bank of Australia will cut interest rates sooner than the market expects, and before May’s federal election, to counter the property correction. “My prediction is that

11

Bureaucratic RBA minutes blinded by detail

Via the RBA come minutes: International Economic Conditions Members commenced their discussion of the global economy by noting that growth in Australia’s major trading partners had been above trend, despite moderating in the second half of 2018. Growth in major trading partners was forecast to be around trend in 2019 and 2020. However, the downside

42

Village idiot RBA whines about contracting gene pool

Via The Australian: The Reserve Bank has called on education authorities to help ­arrest the sharp decline in the number of senior students in NSW studying economics, by ­elevating the status of the subject within the curriculum. Once the third most popular subject choice for Year 12 students, economics enrolments have plummeted over the past

52

Housing bust spreads into services activity

The warnings of slower services activity spreading from the housing bust continue to mount. We know that Westpac is stalled, BOQ is shrinking, McGrathmageddon and Domainmageddon roll on. But these are obvious, direct casualties. More interesting now are indirect multipliers. There’s SG Fleet for instance: Fleet management provider SG Fleet has posted a 7 per

6

Gittins drags RBA towards depression economics rate cut (or vice versa)

Missed this earlier in the week. Ross Gittins is helping lift Australian economic discourse for once: [A rate cut] isn’t [imminent]. It isn’t because, as he made plain in a speech on Wednesday – and reiterated in the statement on monetary policy on Friday – he remains confident the economy has slowed a bit, but no worse. His revised

16

UBS folds: RBA to cut interest rates as unemployment spikes

George Tharenou at UBS has finally joined MB: Recent data clearly shows that the pace of growth is slowing, with weakness in retail, car sales, resi & non-resi approvals, business surveys, home loans & credit. Indeed, the only major ‘positive’ data print in the last month has been unemployment, & while jobs growth remains solid

12

Credit Suisse: Much deeper RBA downgrades to come

Via Damien Boey at Credit Suisse: In terms of the sources of downgrades, the Bank has slightly lowered its outlook for consumption and cut its forecast for residential investment. But it still expects business and public capex to do the heavy lifting. Some other interesting comments from the SoMP include: The RBA’s view that offshore

7

Bill Evans edges towards rate cuts

Via Bill Evans at Westpac before today’s SoMP downgrades: The RBA has started the year with a significant shift, lowering its growth outlook and acknowledging greater uncertainties and downside risks. While the Board still expects the economy to track towards its employment and inflation targets, and does not see a strong case for a near

10

RBA trashes economic outlook, Australian dollar

Funny bastards! February SoMP shredded: Growth shredded by much more than has been previously mooted but still not enough! Then a magical rebound.  Check out the new headline inflation number for June 2019 at 1.25%. They’ve covered over this shocker by elevating core inflation. Then another magical rebound! Someone has finally recognised that the data flow

8

AFR: Two plus one equals four economists

Under the spectacularly misleading title RBA’s ‘neutral’ stance wipes out big four hike calls for 2019, the AFR today serves up a bitter message from the pulpit for Australia’s big bank economists: Westpac, NAB, ANZ and now Commonwealth Bank are now unified in their expectation that there will not be an interest rate hike in

14

As Hayne fades, mortgage rate hikes appear

CBA’s half year result is out today and it reeks of coming mortgage rate hikes: Unexciting at best: falling revenue; falling ROE; falling NEM; rising bad debts 15bps or $577m (vs consensus 13bp) and NPLs 89bp (vs 85bp) NPAT boosted by cost cutting; dividend stalled and broker write downs ahead. Mortgage rate hikes are inevitable

76

REDRUM: Lunatic RBA slays economy

Policy error is the name of the game at the Australian central bank. Witness: house prices in Australia’s two largest cities are in outright crashes; it is spreading steadily to other capitals; building approvals are crashing coast to coast; infrastructure investment has topped out; credit is swiftly falling towards zero; the NAB business survey has

3

UBS: Credit squeeze to continue

George Tharenou at UBS on the Hayne RC and credit flows: Implications: RC still consistent with our view of tighter credit ahead Overall, the RC should not trigger a material acceleration in the tightening of lending standards under way, which should reduce the chance of an imminent ‘credit crunch’. This will likely give some comfort

40

Broker locusts swarm Hayne

Via Domain: The Finance Brokers Association is warning the Hayne recommendations could drive up interest rates. The association’s managing director, Peter White, has gone directly to the proposals around mortgage brokers which has also caught the attention of the government. He said eliminating trail commissions for brokers could ultimately push up the price of loans.

48

No mortgage relief in Hayne

The Hayne pain is here. The most important finding for the economy in the final report is the Commission’s view of the Household Expenditure Measure (HEM) on which its find is quite subtle: 1.2.1 The NCCP Act When dealing with particular case studies in the Interim Report, I concluded that there had been conduct that

20

Shadow RBA sets course for doom

Man, what a pack of muppets! The Shadow RBA: Forecast for 2019 Suggests Cash Rate Should Remain On Hold Australia’s economy has softened, with the growth rate having dropped to 0.3 percent for the September quarter (2.8% annual growth rate) and CPI inflation edging down to 1.8% in the December quarter, below the Reserve Bank

39

Credit Suisse: Why RBA must move to cut the cash rate

Again great stuff from Damien Boey at Credit Suisse who has a much better grasp of the economy than does the lunatic RBA: By now, CPI, unemployment and RBA forecast downgrades are becoming old news … The Consensus view is that the RBA will moderately downgrade its forecasts, but not capitulate on its rate stance