The Australian dollar took off last night after the FOMC meeting concluded with a dovish statement. Yet, under the bonnet, the Fed did shift to a more hawkish outlook and the long-end of the bond curve barely shrugged as yields marched higher. In short, the meeting delivered exactly what I expected, a passive shift in
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.
Will the Fed panic this week? Panic tightening or panic easing? Neither in my view. It just needs to stay the course. Barclays thinks it will be dovish: A number of factors are likely to lead the Fed to considerably improve its outlook for the US economy in March. These include: Progress on vaccinations, case
Mizuho Chief Market Economist Yasunari Ueno: The chief duty of most central banks around the world is the maintenance of price stability. Some countries—including the USA, Australia, and New Zealand—have a dual mandate of price stability and maximum employment. Even in those cases, however, the central bank’s role is to maximize employment within the overriding
Via Kieran Davies, Chief Macro Strategist, Coolabah Capital Investments: RBA Governor Lowe delivered a very important speech yesterday on “The recovery, investment and monetary policy” at the AFR’s business review conference. Arguably the biggest take-aways from the speech were: The RBA has materially revised down its estimate of the fully-employed jobless rate – proxied by the non-accelerating
When MB first proposed macroprudential policy tools for Australia in 2011, we were looked at like we were from Mars. Unfortunately, that’s how monetary regulators behaved as well. Instead of tightening macroprudential policy from the outset as they slashed interest rates, the RBA and APRA treated them with absolute scorn. The rest is history with
Last week’s national accounts release for the December quarter revealed that Australian households accumulated a record $187 billion of savings in calendar year 2020 as they cut back spending (due to COVID restrictions) and banked enormous amounts of stimulus. The problem for these savers is that deposit rates have fallen to a fresh all-time
Via UBS: Housing ‘up-crash’ puts pressure for renewed Macroprudential policies The Australian economy is rebounding very strongly, with data exceeding expectations. With the RBA still maximum dovish, all-time low interest rates and banks willing-andable to lend, Australia is experiencing a housing ‘up-crash’. Interestingly, the Council of Financial Regulators (CFR) is watching housing and “will continue
I have been musing on the likelihood of a new taper tantrum for months. I still think that the inflation pulse that underlies it is temporary. But how much and high long are open questions. To examine the question, Morgan Stanley provides some charts comparing this round with 2013: Taper Tantrum Tracker Across-asset comparison of
As expected, the Reserve Bank of Australia (RBA) held the cash rate steady at 0.10% today and reaffirmed the parameters of the Term Funding Facility (TFF) and bond purchase program. In a nutshell: The RBA expects GDP to return to its pre-COVID level by mid-year. Wage growth and inflation are expected to remain subdued for
A fash note from Kieran Davies at Coolabah Capital: After defending its 3-year bond yield target last week, this morning the RBA doubled its QE purchases of Commonwealth bonds. In the current QE programme, the RBA buys Commonwealth bonds twice a week and semi-government bonds once a week. The Commonwealth auctions are normally $2bn apiece,
The RBA meets tomorrow amid some serious bond market and yield turbulence. This is new territory for the bank. It was only the last meeting that it “shocked” markets by extending its QE program. So, is it prepared to shock again?’ Via UBS: Higher bond yields now imply a very material RBA rate hike cycle
We noted this week that mortgage applications are now so hot that banks are unable to keep up and approval times are blowing out spectacularly. House prices are on the march too. FOMO is loosed and there is no prospect of higher interest rates for years. So freshly listed Liberty Financial is enjoying an unexpected
What a business cycle this is. Juiced by virus amphetamines it is moving extraordinarily fast. Last year we had the crash down, the crash up, a depression, thumping stimulus and K-shaped recovery, a gold boom and bust on debasement, growth stock bubble and now bust plus value rotation, an alleged commodity super-cycle, and now, one
Markets are today busily repricing the prospects for interest rate rises around the world. This is being driven by the vaccine-led post-COVID recovery, ongoing monetary and fiscal stimulus and rising supply-side inflation associated with bottlenecks and runaway demand for goods while services are suppressed by lack of mobility. Yesterday TD Securities argued that the RBA
Via the FOMC: Despite a sharp spike in unemployment since March 2020, aggregate wage growth has accelerated. This acceleration has been almost entirely attributable to job losses among low-wage workers. Wage growth for those who remain employed has been flat. This pattern is not unique to COVID-19 but is more profound now than in previous
I noted earlier that the US inflation panic is likely to drive yields higher yet. For how high we turn first to BMO: The selloff in Treasuries appears to have stabilized overnight after 10-year yields reached as high as 1.331% and 30s touched 2.11%. These extremes were accompanied by an elevated volume profile with cash
From the always worthwhile George Tharenou at UBS: We expect the RBA to tweak its QE operations At their meeting in February, the RBA extended QE and told markets they will continue to buy $5bn/week of bonds until September. However, the Bank didn’t provide any further details on the composition of the buybacks (e.g. range
Fresh from the central bank: Christopher Kent, Assistant Governor (Financial Markets) Introduction Today I will discuss some recent developments in the foreign exchange market, and provide some views on the role of the Reserve Bank’s various policy measures. I will also briefly discuss a modest change to the way the Bank will be using foreign
DXY was firm last night: Australian dollar fell: EMFX too: Gold and oil are doing the opposite, which is quite unsual: Miners to the moon: Base metals likewise: EM stocks whooshka: It’s a sunny day in junk land: Treasuries to the knackery: And stocks no like with the miracle of a down Monday: The Treasury
As we know, the world enjoyed an unprecedented K-shaped recovery last year as goods boomed via stimulus and work from home. But high tough services completely busted amid social distancing. Now, it is becoming plain that inflation trends are following exactly the same pattern. Via some great charts from The Daily Shot on the US
The RBA has never directly acknowledged a single asset bubble that I can recall. So it’s not going to start now. The regime of Phil Lowe did spend the better part of five years keeping monetary policy too tight worrying about bubbles but all that achieved was structural lowflation. It is no surprise, therefore, today,
Via Banking Day: Greater Bank has set a new benchmark in the mortgage market, cutting its one-year fixed rate by 20 basis points to 1.69 per cent. Comparison site Canstar says this is the lowest mortgage rate in the market. Other low-rate lenders in the Canstar database include UBank, which is offering 1.75 per cent
As real interest rates fall and fall, at first via central bank interest rate cuts then via rising inflation meeting central bank’s refusing to hike, cash gets less and less attractive. From UBS: Eurozone inflation jumped by the most in over a decade in January, rising from minus 0.3% in December to plus 0.9%. This
For many years Australia has dragged the chin on unconventional monetary policy. Back in 2012, MB campaigned for zero interest rates, QE and macroprudential tightening. This would have shifted the recovery from house prices to tradables, a much more healthy pattern of growth. The RBA was useless for many years on this question, always looking
With a short term inflation spike about to land on markets BofA takes a look at the critical bond yield levels that would upset stocks: No more TINA The long-standing bullish mantra for stocks has been “There is no alternative” or TINA. Especially for income investors, given that the S&P 500 dividend yield has been
Is QE blowing Australian bubbles? The question has dogged the FOMC for many years. Now, with Australian QE into its second iteration already, the panic is building. Is it justified? Chris Joye argues not: The Reserve Bank of Australia has launched an entirely necessary monetary policy regime that will involve sustained quantitative easing (QE) to