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
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 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
Leith has nicely summarised the new budget: In normal times, I would not have any major concerns with this budget. It is a fairly conservative affair with not too much pork, save for some excessive wage subsidy giveaways to business. The problem is, these are not normal times. This is the biggest economic contraction since
From the RBA glacier: At its meeting today, the Board decided to maintain the current policy settings, including the targets for the cash rate, the yield on 3-year Australian Government bonds, and the parameters for the expanded Term Funding Facility. The global economy is gradually recovering after a severe contraction due to the pandemic. However,
Via an FOI comes Peter Tulip’s incendiary final remarks at the RBA: Farewell Remarks There are two sides to central banking. There is a useful function, such as setting interest rates, where if we do it well people are better off. And there is a ceremonial function such as conferences, hosting international visitors, large parts
Via the excellent George Tharenou at UBS: Record deficits likely: $235bn (12.0% of GDP) in 20/21; $100bn (4.9%) in 21/22 The Australian Government will release the 20/21 (Commonwealth) Budget on October 6 (delayed since May). Unsurprisingly due to COVID-19, we expect record budget deficits. After a balanced budget in 18/19 was the best since the
Via the Fed of SF: Commercial Banks under Persistent Negative Rates With U.S. policy rates back in the neighborhood of zero, there has been renewed discussion of the potential efficacy of negative monetary policy rates. However, Fed policymakers have expressed skepticism about lowering the federal funds rate into negative territory. Fed Chair Jerome Powell recently
That is, before the fiscal cliff: Australian economic recovery is faltering, and more policy stimulus is likely The Australian economy initially significantly outperformed global trends, with Q2 GDP down ‘only’ 7% q/q, and a strong rebound in early Q3 data, seeing the unemployment rate surprisingly drop back to 6.8%. However, recently there are signs the
More groveling from the RBA cockroach army over the weekend. This time, long-term access journalism junkie, Terry McCrann: The contemporary heft of Keating’s extended bleat was the RBA’s alleged failure to move aggressively to QE, or quantitative easing, by buying the bonds issued to fund the exploding budget deficit. As our economics editor Adam Creighton
Ahead of the anticipated announcement of the Federal Governments trashing of responsible lending laws by moving oversight of financial lending from ASIC to APRA, Gunnamatta spoke with David Llewellyn-Smith and Leith van Onselen about the implications of the move, and how this positions the Australian economy. The sound is a touch raw, and the discussion
From Gareth Aird, head of Australian economics at CBA: We expect the RBA to leave monetary policy unchanged at the October Board meeting. We expect the targets for the cash rate and the yield on 3-year Australian Commonwealth Government Bonds (ACGBs) to be maintained at25 basis points. Further near term monetary policy support for the
Paul Keating scattered them briefly but you can’t keep a good cockroach down. Patrick Commins is one: In an extraordinary attack on the country’s most revered economic institution, the former prime minister damned the central bank’s “indolence” through the COVID-19 crisis, accusing it in a statement of being “way behind the curve in supporting the government
Peter Tulip sticking the boot in: I’m quoted agreeing with Paul Keating. The RBA’s culture of timidity can be attributed to the Board being composed mainly of non-economists.https://t.co/O8mgnrc0wo — Peter Tulip (@peter_tulip) September 23, 2020 I agree with @TheKouk. The RBA has persistently failed to meet its statutory targets. As Paul Keating says, this is
Via RBA sockpuppet Terry McCrann today: Westpac’s chief economist Bill Evans has joined NAB’s Alan Oster in predicting a rate cut from the Reserve Bank at its next meeting Tuesday week. I beg to disagree. There is no good reason for the RBA to make such an – essentially symbolic or ‘tidying up’ – cut;
Via the ABC: Paul Keating has accused the Reserve Bank of conservatism, laziness and failing to do what is necessary to head off the worst of the coronavirus-induced economic crisis. In a letter distributed to the media, the former prime minister said the RBA should be funding the “mountainous sums” of government spending required to
Via Alan Oster at NAB: The RBA continues to signal further monetary easing is likely. Deputy Governor Debelle in a speech titled The Australian Economy and Monetary Policy, “outline[d] [the] possibilities for further monetary policy action should the Reserve Bank Board decide that is warranted” and concluded that “the [RBA] Board will continue to assess
Only a decade late, the Lunatic RBA has discovered that unconventional monetary policy will lower the Australian dollar and aid recovery: see chart 7 espeically. Abstract The cash rate is currently at its effective lower bound and the Reserve Bank has put in place a suite of alternative monetary policy tools. This article uses the
From CBA’s head of Australian economics, Gareth Aird: RBA Deputy Governor Guy Debelle listed four ‘other’ options to ease monetary policy further: (i) purchase bonds further out on the curve (supplementing the three year yield target); (ii) foreign exchange intervention; (iii) cut the current structure of interest rates in the economy without going negative; and (iv) negative rates. Purchasing