Everyone is waiting for today’s CPI number as the pivot for whether or not the RBA will cut interest rates again in August. It’s only natural but it’s wrong. Economic data has clearly weakened since the June meeting with unemployment jumping to 5.7% and proximate indicators staying soft, the NAB survey hit four year lows,
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.
For all you MSM optimists out there, I suggest a strong dose of David Bassanese at the AFR today. After a flirtation with bullish housing forecasts earlier this year, Bassanese is now leading the MSM interest rate debate by following MB. He notes today the key change in this week’s RBA minutes: …In the July
Humour giveth and humour taketh away: ANZ RATE VIEW: REVERTING TO PREVIOUS FORECAST. NEXT RATE CUT NOT UNTIL LATER IN 2013 Yesterday’s off-the-cuff humour by the Reserve Bank Governor played an important role in our change of view about the probability of an August easing of monetary policy by the Bank. Following confirmation that this
Glenn Stevens has delivered his first speech in some time this afternoon and it’s an elegant defense of post-GFC RBA policy. In particular his recognition that Australian growth potential has fallen as private sector borrowing has stabilised at more sustainable levels is welcome. This implies that the RBA may be comfortable with lower growth into
The Shadow RBA is out with it’s monthly “hold” call. I prodded this body last month to aim for something a little more innovative, alas, no such luck. If anything the body has become more conservative, failing to discuss the issue of potential tradable inflation, alternative monetary tools, the mining investment cliff, China’s prospects or
Tomorrow’s RBA meeting is a no-brainer hold. Following Thursday’s Pascometer alert that the low is in, the Australian dollar got smashed to a new low on Friday evening and looks to be headed under 91 cents in short order. That will be enough to keep the RBA on the sidelines tomorrow. Not that it should
Find below the June meeting Minutes which reveal an RBA with undiminished faith in the mining boom and the ability produce growth in the non-mining economy. It is also hinting that it sees itself near the bottom of the cycle. I come back to one little word that everyone has ignored. In the April meeting
From Peter Martin this morning come this important story: The head of the Treasury says the Reserve Bank should be prepared to cut interest rates further as the Australian dollar falls, if necessary temporarily breaching its target and allowing inflation to climb beyond 3 per cent. Martin Parkinson is a member of the Reserve Bank
Goldman Sachs has this afternoon added another rate cut to its forecasts, in July: …economic growth at 2.5% yoy is clearly sub-potential and is the continuation in a slippage in Australian economic growth momentum since the December quarter of 2011 where GDP growth peaked at 4.3%yoy. More importantly, it is hard to ignore that if
The RBA yesterday made a subtle change to its post meeting statement that’s been missed. In statements before last month’s cut it has said the following: The inflation outlook, as assessed at present, would afford scope to ease policy further, should that be necessary to support demand. In May it said: The Board has previously
The persistently hawkish RBA Shadow Board calls for a hold today: Since the RBA dropped the cash rate to 2.75 percent last month the Australian dollar has fallen to below 96 US cents, a depreciation of more than 7 percent against the US dollar. With weaker data coming from China, India and Europe and mixed
I note that after this morning’s data deluge, interest rate markets have reduced the prospects of an interest rate cut tomorrow from 17% to 14%. Both of these are foolishly low. I note that betting markets are even more skeptical: Here’s a recap of this morning’s data: China non-manufacturing PMI neutral to weak Australian house
Australia’s best mainstream economic commentator, Tim Colebatch, wrote a barn burner yesterday afternoon: The resources boom is over, sooner than anyone expected. Capital expenditure in mining essentially peaked in mid-2012, flatlined over the following six months, then plunged steeply in the March quarter, wiping almost $1.5 billion off Australia’s quarterly output. The Bureau of Statistics
It’s a good day for Paul Boxham, who has claimed his prize: Australia’s capital expenditure survey was generally more positive than expected. While the actual data for Q113 fell, the survey’s forward estimates held up well. For Q113 the numbers imply a fall in investment of -4.7% (market had +0.5%) and while this will be
From the AFR comes the next debate about interest rates: A falling dollar should provide an easier environment for domestic businesses as imports become more expensive and exporting grows easier. It may also limit the need for further interest rate cuts. But if Australia’s non-mining sector needs a big push, the Reserve Bank of Australia
Ahead of this Thursday’s release of the Capex spend data for 1Q 2013, David Llewellyn-Smith spoke with Gunnamatta about the significance of Mining Capex as an Australian economic driver in recent years, why it has started to weaken, and the implications for the Australian economy, moving forward, of a declining Capex spend.
Find here a video (click – 56mb MP4) , or watch below, of Warwick McKibbin from last night’s ABC “The Business”, which is swiftly emerging as the best business TV in the country (certainly preferable to AFR Sunday), in which he discusses a shift in global central banks and their comfort with inflation.
The RBA’s May Statement of Monetary Policy is out and those looking for concrete answers to this week’s rate cut will be disappointed. There is not much more to go on than that offered in the statement following the meeting: Over 2012, the Board reduced the cash rate by 125 basis points, bringing it to
I’m beginning to admire Paul Bloxham. He has the courage of his convictions. He will not be swayed on his call that the RBA’s rate cut cycle has bottomed (even a day after it didn’t bottom) and today’s labour market release is just the tonic: Australia’s employment numbers showed strong growth in April, rising by
MB’s favourite interest rate prognosticator is back this morning, as predicted, with more rate cuts in his satchel, three of them to be precise: We expect the Reserve Bank will complement its May rate cut of 25 bp’s with a follow up move of 25 bp’s in June. Rates are expected to eventually bottom out