Following today’s Board Minutes from the RBA, Westpac’s Chief Economist, Bill Evans, sees two more rate cuts in 2014 on the back of below trend growth, the stubbornly high Australian dollar, and a weaker than expected housing-led recovery: As expected, the Minutes to the November RBA Board Meeting retained the key statement that “The Board’s
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.
Another opportunity to jawbone the currency was missed today by the RBA with very little mention of the dollar and lots of mentions of the efficacy of interest rates. Accordingly the dollar rose, ensuring the the inefficacy of interest rates. Full minutes below. International Economic Conditions Data released over the past month suggested that growth
More good stuff from from Chris Joye this afternoon: The exuberance in shares and housing will continue for as long as central banks deny savers decent rates of return in safer investments. So how will one know when the worm turns? Look to bond market bandits rationally punting billions on the direction of future rate movements.
From Max Walsh at AFR today: Professor Rey, drawing on the experience of the global financial crisis, argues one of the determinants of the global financial cycle is monetary policy in the US, which affects leverage of global banks, capital flows and credit growth in the international financial system. ..She says: “Independent monetary policies are possible
The RBA’s occasional Statement of Monetary Policy is out and is making its way inexorably towards MB. Here is the money passage: The forecast for the domestic economy has been revised to account for some developments working in different directions. Based on company statements and the Bank’s liaison, mining investment looks like it might decline
RBA on hold with a neutral bias. Here’s the statement with lot’s uncertainty around the investment outlook and very sensibly directly warning dollar bulls: At its meeting today, the Board decided to leave the cash rate unchanged at 2.5 per cent. Recent information is consistent with global growth running a bit below average this year, with
From the Shadow today: Has the Australian Economy Turned the Corner? This month there is not much new information to guide policy. The new coalition government has not announced any big policy surprises, the US government budget crisis was deferred for a further four months (as widely expected), European economic growth remains subdued, and Asian
From the SMH: All the big four banks have increased some of their fixed rates over the past month…”With interest rates at all-time lows, it’s inevitable that rates will start to rise and while it is too early to call when this will happen, it’s not inconceivable that this could happen next year,” said Alex
At last some sense from the RBA in a strong speech this morning from Captain Glenn: As ever, the times remain ‘interesting’. You will have much to talk about. I will confine myself to some brief remarks, firstly about the global scene, and then about the situation in Australia. From this distance, the US economy
A number of economists have leapt upon today’s CPI print to declare the end of the rate cutting cycle. This is false in my view. Rate cuts have been off for the past several months as Sydney property prices have entered an unprecedented price blowoff. This is a much more significant issue than today’s CPI
Readers may recall that a part of Wayne Swan’s doomed attempt to scrape up a surplus was depleting RBA reserves via taking dividends from the bank against the wishes of Captain Glenn. No longer, from the AFR: Treasurer Joe Hockey will make a one-off $8.8 billion capital injection to the Reserve Bank of Australia to
The IMF has produced new economic modelling endorsing the use of macroprudential policy to dampen credit cycles in currency constrained EU countries. The study undertook modelling for two Eurozone countries, and was aimed to examining whether maroprudential policy was an appropriate way to govern credit when neither interest rates nor the currency are not being
According to the SMH echo chamber, the RBA’s Luci Ellis concluded her misleading speech today with a Q&A quip: ‘‘I think there are a lot of people, the minute housing prices start to pick up they say, ‘Oh my goodness, we’ll all be rooned’’’, Ellis said. ‘‘The minute housing prices start to pick up they
Pretty boring effort from Captain Glenn this afternoon delivered to the to the Australian British Chamber of Commerce. Nothing of import nor new but a potted history if you have time. It could have been the Dutch who started European settlement in Australia. In their journeys to the East Indies numerous Dutch traders saw the western
Bill Evans latest dovishness below. The Reserve Bank prudently maintained its easing bias in the October Board minutes. The most important aspect of the minutes was the decision by the Board to retain the following sentence: “Members agreed that the Bank should again neither close off the possibility of reducing rates further nor signal an
The movement is spreading fast. Singapore has progressively joined the legion of nations moving to install macroprudential policies to control asset prices and suppress currencies. From Bloomberg: The government this year ramped up efforts to bring down property prices that surged to a record, adopting some of its strictest measures, including a cap on debt at 60
One of the AFR‘s better commentators, David Bassasnese, chimes in today with a forecast for more rate cuts: …My base case remains that the next move in official interest rates remains down, and most likely in February next year. After all, the RBA reaffirmed in the latest minutes that – based on current evidence –
Pretty somber minutes from the RBA’s last meeting out today with the kicker in the final paragraph. International Economic Conditions Members opened their discussion with the observation that, on balance, the data for the global economy had been a bit more positive of late and broadly consistent with growth of Australia’s major trading partners remaining
Nothing really new from Bill Evans but a neat summary of recent data today on why rates are now on hold: Firstly on business, we have already pointed out the evidence in 1996 when a Coalition victory (after a long period in opposition) was greeted with solid boosts to business confidence although business conditions were
Terry McCrann has written an important article today that shows just how far this country’s macro debate has moved: BARACK Obama’s nomination of Janet Yellen to be the next and first woman head of the US Federal Reserve is of major significance for Australia. Her certain confirmation to succeed Ben Bernanke at the end
Deutsche has interesting note today examining why the Australian to US bond yield has blown out: The 10Y ACGB/UST spread has widened sharply since the start of October to more than 140bp. Given the debt ceiling impasse in the US this seems counterintuitive. The widening also seems to be more than can be explained by
Cross-posted from The Conversation. Media reports about alleged involvement of subsidiaries of Australia’s premier financial institution and regulator, the Reserve Bank of Australia, in bribery cases would disturb every right-minded Australian. After all, though independent, this prestigious arm of the Australian Government is a watchdog of the Australian financial system and is an agency responsible
Fresh from NAB: Recent RBA statements suggest the central bank is comfortably on hold and we have decided it is more likely that the next easing of policy will be delayed until February. However, the big picture remains intact with the economy expected to under perform over the year ahead, more so for domestic demand,
Chris Joye does a good job this morning of summarising the unanswered questions around the RBA scandal: Three important questions remain outstanding. First, has the RBA misled Parliament and the federal Treasury about what it really knew in 2007, as the key whistle-blower claimed on ABC Four Cornerson Monday night? Second, should the RBA have prudently
Here’s a sensible commentary from Stephen Walters at JP Morgan: The RBA today surprised no-one by leaving the cash rate steady at 2.5%, as all 33 surveyed economists had anticipated. The focus, then, was on the commentary and, here, there also were no bombshells. Having eased two months ago, the statement indicates that RBA officials are
No surprises today from the disgraced Reserve Bank of Australia (DRBA): At its meeting today, the Board decided to leave the cash rate unchanged at 2.5 per cent. Recent information is consistent with global growth running a bit below average this year, with reasonable prospects of a pick-up next year. Commodity prices have declined from