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
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.
From Deptuy Chief Lunatic, Guy Debelle: The Australian Economy and Monetary Policy My talk today will cover three topics. First I will provide a perspective on the historic decline in output that both the Australian and global economies have experienced and discuss the current state of the economy. Second I will explain how the monetary
The mistake of 1937 is a very useful historical guide for policymakers wrestling with an economic depression. Via the ECB: The economic conditions can be summarized as follows: 1) There are signs that the depression is finally over. 2) Interest rates have been close to zero for years but are now finally expected to rise.
Via FTAlpahville comes a VERY IMPORTANT post for Australia: This is a guest post by Leo Hindery, Jr, a member of the Council on Foreign Relations and formerly CEO of AT&T Broadband and its predecessor, Tele-Communications, Inc. (TCI). He is currently Chairman and CEO of Trine Acquisition Corp., a NYSE-listed company which he founded. The
Via our Chris today: Another week passes and yet another bank has upgraded its housing outlook in line with our heterodox March forecast for a zero to 5 per cent decline in the six months after the COVID-19 shock followed by 10 per cent to 20 per cent capital gains. Last week CBA sensationally dumped its
The Australian Bureau of Statistics has joined Australia’s War of Stupid. Recall: For the last few years, that outlook has been a War of Stupid between overly tight monetary policy versus overly tight fiscal policy. The RBA refused to ease for years, demanding instead that Josh Depressionberg spend more on productivity-enhancing investment. Depressionberg pointedly did
More capital from the Aussie ponziteers: The Reserve Bank’s – Te Pūtea Matua – latest stress test of New Zealand’s banks illustrates the benefit and necessity of shoring up bank capital in the good times to provide resilience. The COVID-19 pandemic has demonstrated that large shocks can occur with very little warning. “The onset of
It’s just awful listening to the lunatically conservative RBA, via yesterday’s minutes: The US dollar had depreciated significantly against the currencies of other advanced economies over recent months, including the Australian dollar. In part, this reflected an unwinding of the earlier appreciation of the US dollar related to an episode of financial market volatility in March and
Via Banking Day: A significant shift in the framework of the Reserve Bank of Australia’s monetary policy is underway that could culminate into the Term Funding Facility becoming the effective instrument for implementing monetary policy and making the cash rate target almost redundant for the next few years. The interest rate corridor system of implementing
If anything penetrates the thick skulls at the Lunatic RBA it might be the constant humiliation it receives at the hands of the RBNZ, a vastly superior central bank on every measure. The RBNZ handles both monetary and prudential policy with 20% the staff of RBA and APRA. This enabled it to lead on macroprudential
Last week was a seminal one for the Australian economy and investment outlook. We now have a clear view of what the post-COVID world will look like from the point of view of Australian policymakers. For the last few years, that outlook has been a War of Stupid between overly tight monetary policy versus overly
Cross-posted from FTAlphaville: From the June 2017 edition of The Economist: That central banks cannot endlessly reduce unemployment without sparking inflation is economic gospel. It follows from “a substantial body of theory, informed by considerable historical evidence”, according to Janet Yellen, chair of the Federal Reserve. Her conviction explains why, on June 14th, the Fed raised
Gareth Aird at CBA sees change at the RBA: It’s very easy to miss little changes in the RBA’s communication. But it’s very important to look at each and every word in the Governor’s post meeting statements and how his language evolves. Changes to the statement each month are not made lightly. Indeed words and
Via the Lunatic this afternoon: At its meeting today, the Board decided to maintain the targets for the cash rate and the yield on 3-year Australian Government bonds of 25 basis points. It also decided to increase the size of the Term Funding Facility and make the facility available for longer. Under the expanded Term Funding
The Reserve Bank Board meets next week and policy is certain to remain unchanged. The three year bond rate target of 0.25% is set to remain in place “until progress is made towards the Bank’s goals of full employment and the inflation target”. And the Bank would not increase the cash rate target “until progress
The US Federal Reserve last night dropped a deflationary bomb on Australia: Following an extensive review that included numerous public events across the country, the Federal Open Market Committee (FOMC) on Thursday announced the unanimous approval of updates to its Statement on Longer-Run Goals and Monetary Policy Strategy, which articulates its approach to monetary policy and
From Barclays: In the US, the resumption in activity has been brought about by the falling number of COVID cases and increasing mobility which bodes well for the outlook. We maintain our recommendation of shorting 20y Treasuries as the improving backdrop argues for lower safe asset premium. With rising uncertainty about the Fed’s reaction function,
The annual Jackson Hole central banking swingers party is later this week. Via FT: Several Fed officials have already expressed a willingness to allow inflation to run above the central bank’s 2 per cent target to make up for prolonged periods of undershooting. In Europe, investors will be looking for any clues about the likely next
Amusing stuff, via the ABC: Top brass at Australia’s central bank have hit back at ABC reporting that exposed how the dire view of the housing market held by some Reserve Bank staff clashed with the rosy picture the bank’s representatives presented in public. Staff then sought “receptive” journalists to tell their side of the
John Edwards at The Lowy Institute: EXECUTIVE SUMMARY Australia is emerging from the pandemic sooner and at less economic cost than widely expected, but with higher unemployment and elevated debt. As the pandemic recedes, it is evident that global output and demand will recover slowly and unevenly. Major advanced economies have sharply increased government debt
Via Bloomie comes the eponymous Peter Tulip, ex-RBA: “The evidence suggests that negative interest rates work,” said Tulip, now chief economist at the Centre for Independent Studies — a think tank in Sydney. “Why is the experience of other countries that have successfully used negative interest rates, why is that inapplicable to Australia?” Reserve Bank
In his own quiet and elegant way: Recently the Bank has communicated extensively with the market. This has included a major speech from the Governor to the Australian Business Economists; his the semi annual appearance at the House of representatives Standing Committee on Economics; and the August Statement on Monetary Policy. So, it comes as no surprise
Via the excellent George Tharenou and Carlos Cacho: Economic outlook deteriorated sharply, amid 2nd wave of COVID & restrictions With the 2nd wave of COVID seeing tighter mobility restrictions in Australia, including an extended ‘State of Disaster’ in Victoria, the economic outlook is deteriorating. Indeed we recently halved Q3 GDP to 0.6% q/q, and still
Via Westpac: In last week’s biannual parliamentary testimony before the House of Representatives Standing Committee on Economics, RBA Governor Lowe made some specific references important to the bond market. His position on borrowing and budget deficits is quite clear: “By borrowing today to support the economy we are avoiding an even bigger loss of output
Via Bill Evans at Westpac: Today Reserve Bank Governor Lowe made his biannual address to the House of Representatives Standing Committee on Economics. His dominant theme is the need to support the economy through job creation. Every policy should be judged on its capacity to boost jobs. His position on borrowing and budget deficits is
From Westpac chief economist, Bill Evans: Today Reserve Bank Governor Lowe made his bi-annual address to the House of Representatives Standing Committee, Economics. His dominant theme is the need to support the economy through job creation. Every policy should be judged on its capacity to boost jobs. His position on borrowing and budget deficits is
Here it is from Luci Ellis as she spruiks the new dart-throwing forecast: Closure of international borders to most movements of people is affecting Australia’s international trade and will continue to do so over the forecast period. International tourism will be infeasible until borders reopen, and will probably only recover slowly. This will affect both
The new SoMP: During the first half of the year, the COVID-19 pandemic led to the most severe contraction in global and domestic economic activity in decades. Since around May, economic conditions have started to recover as containment measures have been eased and fiscal and monetary policies have provided significant support. But a high degree of
This is late. There is no need to be in a hurry now that the RBA has rendered itself entirely irrelevant: At its meeting today, the Board decided to maintain the current policy settings, including the targets for the cash rate and the yield on 3-year Australian Government bonds of 25 basis points. The global economy