The RBA has driven yields down but dang is that curve warped: That slope says massive recovery with inflation imminent! Not. As the risk parity liquidaton eases I expect long end yields will fall along way. Indeed, for some enterprising hedgie with the firepower to do it, it is a singular arbitrage opportunity. There is
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.
Notice today that there is no pressure on the banks to cut variable interest rates from any quarter. Not one press article. No comment from the Government. Nor the RBA. This is a great insight into how Australia’s Game of Mates works. Somebody, likely the RBA and the Government as well, has gotten on the
Private funding that is. There’s $90bn in RBA coconuts on the way. Interbank spreads are still wide: GSIBs globally are locked up: Locally, things got a little worse yesterday with WBC CDS at 96bps: And all of this before we see a single bankruptcy of scale. The crisis did not begin with the banks but
From Captain Phil: Good afternoon. The Reserve Bank Board met yesterday and decided on a comprehensive package to help support jobs, incomes and businesses as the Australian economy deals with the coronavirus. I would like to use this opportunity to explain this package and to answer your questions. We are clearly living in extraordinary and
From the RBA just now: The coronavirus is first and foremost a public health issue, but it is also having a very major impact on the economy and the financial system. As the virus has spread, countries have restricted the movement of people across borders and have implemented social distancing measures, including restricting movements within
Via FT: As the number of coronavirus cases has exploded across the US, the idea of a direct cash transfer to Americans has emerged as the primary feature of the Trump administration’s $1.3tn response to the crisis. The idea of a direct cash transfer to limit the economic damage from the spreading disease had been
Via the ECB: ECB announces €750 billion Pandemic Emergency Purchase Programme (PEPP) 18 March 2020 The Governing Council decided the following: (1) To launch a new temporary asset purchase programme of private and public sector securities to counter the serious risks to the monetary policy transmission mechanism and the outlook for the euro area posed
Via the AFR, this sure sounds like a leak: The Reserve Bank will cut the cash rate to a record low of 0.25 per cent and target four-year government bonds in the country’s first major quantitative easing package worth a speculated $50 billion, all designed to contain a blowout in borrowing costs for corporates and
Today Phil Lowe faces the most important moment of his career, the gravest moment in his central bank’s history and, to put it bluntly, the most far-reaching moment for the contemporary financial system, as well as the liberal capitalism that it represents, that any Australian central banker will ever face. I am not kidding. Today
Via FTAlphaville: We wrote yesterday about how the revival of dollar swap lines on far more relaxed terms was by far the most important thing the Federal Reserve has done thus far. However, there are some flaws – chief among them that there is no swap line between the US central bank and its Chinese counterpart, the
Bond markets. Whoa! Last night Treasury yields jack-knifed again: Why is not clear. There was rumour and scuttlebutt around Trump’s $1tr simulus. But inflation breakevens are crashing: So the Treasury sell makes little sense in terms of a punt on a v-shaped recovery and/or fiscally induced inflation. That leaves us with risk parity fund liquidation,
Cross-posted from FTAlphaville: Few things are as likely to imbue us with that sense of global financial crisis déjà-vu than a dollar swap line. Last night the Federal Reserve announced it was easing the terms on which it provides foreign banks access to greenbacks. The swap lines in four of the five locations listed in
Ray Dalio on what the world needs now: The Implications of Hitting the Hard 0% Interest Rate Floor While I’m going to pass along my thoughts to you, I want to emphasize that I wasn’t, and still am not, able to anticipate the most important things happening in the markets because of the extremely rare
Via Bill Evans: Today, the Reserve Bank released a Statement which was aimed at addressing liquidity issues in the Australian financial market. The liquidity policies were aimed at both the government bond market and the bank funding markets. Earlier in the day, we saw aggressive policy changes from both the US FOMC and the Reserve
Via Damien Boey at Credit Suisse: Over the past few days, we have seen the stimulus headlines come in thick and fast: The US government has come up with a coronavirus stimulus package with bipartisan support, with payroll tax recovery to be debated at a later date. The Fed has just cut rates all the
From Phil Lowe just now: As Australia’s financial system adjusts to the coronavirus (COVID-19), financial regulators and the Australian Government are working closely together to help ensure that Australia’s financial markets continue to operate effectively and that credit is available to households and businesses. Refer to earlier CFR press release. Australia’s financial system is resilient and it is
The media fixation with equities has completely blinded it to what matters. The global economy is about to take an immense loss. Equites are going down with it, as they should. Nothing can stop that now. But all that matters in terms of systemic risk is credit. That’s the Fed’s target. To unwind the dislocation
Alan Kohler springs to life: It’s now clear to us all that the problem for authorities is to try to prevent the health system from being overwhelmed without causing an economic depression. That’s with D, as in 10 per cent GDP contraction, not an R for a two-quarters recession, which is already a given. Prime
From the RBA and its somnabulant friends: Statement by the Council of Financial Regulators – March 2020 As Australia’s financial system adjusts to the coronavirus (COVID-19), financial regulators and the Australian Government are working closely together to help ensure that Australia’s financial markets continue to operate effectively and that credit is available to households and
Via FTAlphaville: There’s growing evidence that markets think central banks have reached the limits of their capabilities. Even if they haven’t, it’s what markets think that really matters. Gillian Tett recounts this point really well in her column today. Read that here. As she notes: But it might also reflect something else: some investors no longer
John Kehoe is close to the RBA and writes just now: The Reserve Bank of Australia may be forced into an emergency monetary policy easing after central banks in the United States and New Zealand slashed interest rates to almost zero overnight. …The RBA may soon resort to an unscheduled rate cut and unconventional stimulus
Cross-posted from Zero Hedge on some seriously fucked global financial plumbing. As Bank of America’s rates expert, Mark Cabana – formerly of the NY Fed – writes on Saturday, “the Fed has been on fire” lately, which in light of the Fed’s activities in the past two trading days of the week, may be an
At Banking Day: Macquarie Bank has joined National Australia Bank in withdrawing hybrid security offers, with both citing market volatility and its likely impact on the price of the notes once they listed. Macquarie withdrew its A$500 million offer of Macquarie Capital Notes 2, which it had launched on February 11, saying it made the