Via Bloomie, bring it on: Prolonged equity losses and monetary easing by the Reserve Bank of Australia can send the nation’s 10-year bond yield into negative terrain for the first time, according to Craig Vardy, head of fixed income for Australia at the world’s biggest money manager. …Quantitative easing may be implemented in the fourth
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.
It’s worth revisiting. All last week pointed to the bizarre pricing of rate cut odds in Australia and the strange calm in bond markets. Friday night both came apart in spectacular fashion: All yields are at record lows: The curve is inverted past the ten year, screaming at the RBA to slash rates: But, alas,
The Shadow RBA is out with its usual hawkish preening today: Covid-19, Weak Wages Growth, and Persistently Low Inflation: Cash Rate Should Remain Steady, Just Fear about a global coronavirus pandemic are already taking their toll on world financial markets and are likely to impose significant economic costs on the Australian economy, should the crisis
The entire interest rate community in Australia is caught so far behind the curve it is shocking. COVID-19 is loose worldwide with cases doubling every four days and describing a classic parabolic curve. At the current rate of infection, by the April RBA meeting there will 3.3m infected. If left unchecked, by the May meeting
Via Moody’s: Fed Rate Cuts May Fall Short of Stabilizing Markets Markets are trying to “price-in” an event for which there is no readily known precedent. Volatility will rule until COVID-19-related risks reverse course. Since COVID-19 first pressured U.S. equities following January 17’s close, the market value of U.S. common stock as measured by the
The hilarious mispricing of everything continues. According to rates markets there is now a full 11% chance of an RBA cut next tuesday: Are markets, the RBA or both really that stupid? Despite this, the 10 year yield has sunk to all-time lows today: Even so, the curve has been steepening recently which must go
Via FTAlphaville: Amid the border closures and flight cancellations, comes one trip that — were it not for the coronavirus — might never have happened. The money helicopter has arrived. Via the South China Morning Post: Hong Kong permanent residents aged 18 and above will each receive a cash handout of HK$10,000 (US$1,200) in a HK$120 billion
Via Bloomie: The global credit machine is grinding to a halt. The $2.6 trillion international bond market, where the world’s biggest companies raise money to fund everything from acquisitions to factory upgrades, came to a virtual standstill as the coronavirus spreads fear through company boardrooms. In the U.S., Wall Street banks recorded their third straight
Capital Economics still looking at April: …we don’t think that the RBA’s concerns about financial stability are an insurmountable hurdle …housing finance commitments have rebounded…consistent with housing credit growth remaining very subdued …we think it may fall to US$0.65 by the end of the year The RBA must cut next week. First, COVID-19 is no
There are five reasons why Phil Lowe should get boned. First, after a near decade of failed forecasting at the bank, the Lowe RBA is still resolutely projecting imminent rebounds for wages and inflation. Second, the Lowe RBA refuses to use underemployment as its key labour market measure over unemployment, when it is the former
First up is George Tharenou at UBS: The Jan labour report was materially weaker: y/y jobs slowed to the worst since Apr-17, hours dropped 0.4% m/m, underutilisation spiked to the highest since Apr-18, & unemployment lifted 21bps (the largest m/m rise since Jan-16), to the equal highest since May-18 – all before the significant impact
Who can forget this absolute public policy shocker by the RBA: Ready for round eight? In it’s most recent Statement, the RBA noted: Wages growth was broadly as expected in the September quarter. The majority of firms in the liaison program continue to expect little change in wages growth over the next year, and only
Via the excellent Damien Boey at Credit Suisse: We have updated our proprietary wage inflation tracker for the latest partial indicators – and the results suggest that we should look forward to 2% annualized wage inflation in the coming quarters – well short of the RBA’s desired 2.5% annualized. Key components of our wage tracker
Via Bill Evans at Westpac: The minutes of the February Reserve Bank Board meeting do not provide much further information than we have seen from other communication from the Reserve Bank in recent weeks including the Governor’s speech to the National Press Club; the Statement on Monetary Policy; and the Parliamentary testimony. Key to the
Perhaps freshly off the blower with Highrise Harry, Gottiboff explores some COVID-19 scenarios today. If it is stopped he says: …On the weekend I was yarning with a Hong Kong resident who has temporality switched his base to Australia. He tells me the coronavirus is far more destabilising than the riots and a great many
From the Loon: International Economic Conditions Members commenced their discussion of the global economy by noting the International Monetary Fund’s forecast for global growth to pick up in 2020 and 2021. The easing in trade tensions between the United States and China, and ongoing stimulus delivered by central banks, had supported a modest improvement in
Scotty from Marketing is having us on again, as he can in Australia’s memory-free corporate propaganda soup (that is, the media): Scott Morrison has accused General Motors of allowing the iconic Holden brand to “wither and die” after demanding billions of dollars in taxpayer subsidies to remain in Australia. US-based GM announced on Monday it was
Perhaps it’s time to bet on inflation, via Domain: Interest rates could remain low for “decades”, the Reserve Bank governor has signalled while warning Australians may be starting on a fresh binge of mortgage debt that could expose one of the nation’s biggest economic vulnerabilities. Amid continuing signs the retail sector is struggling, Philip Lowe
Several weeks ago I wrote: The formulation of the gathering catastrophe is simple. Coronavirus is loose in China. The Chinese Communist Party has declared war upon it and must win lest it jeopardise itself. As the virus explodes, the base case for that is now to progessively shut the country down for six-to-nine months. There
Via Westpac: The Reserve Bank has released its quarterly Statement on Monetary Policy (SMP). The report rounds out a full week for RBA communication that has also included the Governor’s decision statement following the Board’s February policy meeting, a speech on “the year ahead” and this morning’s semi-annual testimony to Parliament. The key themes throughout
What’s the need when everything is always all good, via Domain: Reserve Bank governor Philip Lowe says the economic risk of the coronavirus is greater than SARS, as the infection rate surges and countries shut their borders. Dr Lowe said there were hopes the number of cases would fall and the economy would bounce back
Via the AFR: “For now better momentum has at least been demonstrated,” JP Morgan’s Ben Jarman said, “and this is sympathetic to the RBA’s characterisation of a gentle turning point, even if a new risk has arisen that could buffet the data significantly.” Goldman Sachs chief economist Andrew Boak went further, suggesting the RBA would
Is the RBA or APRA responsible for house prices? Yesterday we got the following from Phil Lowe as the stall speed Aussie economy endures both endogenous and exogenous shocks: Our central forecast is for the Australian economy to expand by 2¾ per cent over 2020 and 3 per cent the following year (Graph 5). These growth rates are a little
Via the McCrann RBA sockpuppet today: The Reserve Bank left its official interest rate unchanged, as I told you it would a week ago. More importantly, it is expecting to leave it unchanged pretty much into the foreseeable future. That means not just through this year but into 2021 as well. That was made clear by
Some might say stupid. From Bill Evans: As expected, the Reserve Bank Board decided to keep the cash rate unchanged at 0.75%. It is noteworthy that the Board has also not adjusted its growth forecasts for 2020 and 2021 holding them at 2.75% and 3% respectively. The discussion around the two recent shocks to growth
From the Lunatic just now comes no surprise, really: At its meeting today, the Board decided to leave the cash rate unchanged at 0.75 per cent. The outlook for the global economy remains reasonable. There have been signs that the slowdown in global growth that started in 2018 is coming to an end. Global growth is expected
First, the update today: And charting the current daily growth rate of new cases gives us this parabolic curve: By the time of the March meeting there will be roughly 300k total cases. By the time of the April meeting that number will be approaching 1.1m cases. But that doesn’t account for the virus taking