In the Q&A after an unrelated speech today, RBA boss Glenn Stevens said: “The key points here are that we are keeping a close eye on the buildup of credit to investors in the housing market…Lending standards are things that need to be carefully watched in a time when house prices are rising quickly and
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.
By David Llewellyn-Smith Macroprudential tightening is coming but what kind? In the course of a year, the Reserve Bank of Australia (RBA) has swung from a viewpoint that macroprudential is “dreaded” and the “latest fad” to an endorsement of doing something about the housing bubble that doesn’t involve raising interest rates. Throughout this time there have been
The business-as-usual crowd in the press has had an interesting reaction to today’s soft CPI. Phil Baker at the AFR reckons: The real concern is do we need that rate cut and are we going down the deflationary path like the rest of the world? …Wednesday’s latest inflation report won’t kill off talk of the possibility
Via Forexlive: From Barclays economist Kieran Davies, on the October monetary policy board meeting minutes (released earlier today): The RBA board appears to have discussed macroprudential tools at the meeting No disclosure in the minutes, though Davies is of the opinion that the RBA may introduce a new ‘macro-prudential’ measure before the end of 2014 Davies
The RBA minutes for October are out: International Economic Conditions The global data released over the past month suggested that Australia’s major trading partners had continued to grow at around their long-run average pace over the past year, although there had been quarterly volatility in growth in some of the major economies through the year.
From the SMH blog: …27 economists surveyed by Bloomberg, 26 expect rate hikes next year. But bond markets are pricing in the chance of the opposite. And in the wake of this week’s turmoil economist, Guy Bruten at Alliance Bernstein lists four circumstances (aside from GFC II) that may prompt the RBA to cut, rather than, hike rates
From Tim Toohey: A feature of our research over the past 18 months has been to break away from the guide posts that have served us well in obtaining a read on the future direction of economic activity over the past decade. Historically we had looked to easing financial conditions, rising confidence and rising wealth
Jeez this is bad, from Forexlive: Client note from UBS economists (via MNI): RBA’s “neutral” cash rate level is lower than before at around 3.75% to 4.0%, compared with “traditional” neutral cash rate of 5.5% to 5.75% They cite: “A combination of wider domestic lending margins relative to the RBA cash rate The likelihood of
The RBA’s Head of Financial Stability Department Luci Ellis has delivered a fairly uninteresting speech today looking at macro-modelling and financial cries. It is far more interesting from the political economy perspective of a persistent critic of macroprudential policy very explicitly stepping out of the way of new policy tools that are clearly coming. I’ve highlighted the
Cross-posted from Martin North’s DFA blog: The Bank of England (BoE) recently published their Q3 Credit Conditions Survey. This is the first edition since the recent Mortgage Market reforms were introduced, and the macroprudential controls were tabled. Looking specifically at secured lending to households they report that demand for credit has eased, and the proportion of
Cross-posted from Martin North’s DFA blog: According to the Irish Times new rules will be applied to mortgage lenders in Ireland from 1 January 2015. A 2 month consultation period now starts, so they may get tweaked before implementation. The UK had announced parallel measures earlier. New mortgage rules published today mean that most house buyers will have
As I’ve argued many times, the US bond bull market that many expect to die is the new incarnation of the Japanese “widow-maker” trade. Last night, as the equity market correction continued, the bond bull market broke out again, despite the rising impression of looming interest rate rises in the US. Yields at the long
Cross-posted from Martin North at DFA blog: In the just released IMF World Economic Outlook, as well as revising down growth estimates, they discuss macroprudential, highly relevant in the light of RBA comments. The main observations are: there is evidence that macroprudential can assist in manage house price growth, and credit growth. Different settings should be applied
From our Bill: As expected the Reserve Bank Board decided to leave the cash rate unchanged at 2.50% at the October meeting. There had been some speculation that due to the Bank’s concerns about investor property it might eliminate the final sentence from previous statements: “On present indications, the most prudent course is likely to
No material change: At its meeting today, the Board decided to leave the cash rate unchanged at 2.5 per cent. Growth in the global economy is continuing at a moderate pace. China’s growth has generally been in line with policymakers’ objectives, though some data suggest a slowing in recent months. Weakening property markets there present
From Chris Joye today: Sitting in a palatial Sydney office with a senior executive from one of Australia’s biggest banks, my eyes burst open wide in surprise as he blindsides me with his solution to the sunburnt country’s burgeoning housing bubble. “The Reserve Bank should simply bite the bullet and lift interest rates by 25
It’s RBA week and the Shadow RBA is shifting to rate rises: After lingering around the US¢93 mark for several months, the Aussie dollar recently depreciated by approx. US¢5, while other domestic and international economic data continues to be mixed. This fall should help stimulate and rebalance the domestic economy but the extent is uncertain.
From the AFR: The Reserve Bank of Australia is weighing up whether to force banks to adopt New Zealand-style limits on mortgage lending to cool an overheating housing market. …Joe Hockey conceded on Thursday there were “clearly significant” price gains in parts of Sydney, Melbourne and “to some degree” in Brisbane…“obviously the Reserve Bank will
From Westpac’s Bill Evans today: The minutes of the Reserve Bank Board’s Monetary Policy meeting of September 2 have raised the level of concern that the Bank is now signalling around Australia’s residential property boom. Specifically the Board notes: “policy also needed to be cognisant of the risks to future growth that could accompany a large further build up in
The theme de jour is leadership ineptitude. Follow Christopher Kent’s dreadful speech and Joe Hockey’s appalling cheer-leading comes the RBA minutes which have ramped concern about property but haven’t ramped thoughts about macroprudential leading markets to bid up the dollar 20 pips: International Economic Conditions Members began their discussion by noting that the pace of
The RBA deputy governor Christopher Kent continues the central bank’s unfortunate obsession with the confidence fairy today with a deep interrogation of the poor girl: I’d like to thank Bloomberg for the opportunity to talk to you today. I discussed this topic at this same venue 18 months ago. The outlook for non-mining business investment
From Professor Ross Garnaut over the weekend: “We needed a lower real exchange rate 18 months ago,” Professor Garnaut said. “There may be excessive price inflation in housing, and if that is the case it is very important that we deal with that problem with specific measures rather than running our whole monetary policy to
From Professor Warwick McKibbin at the AFR today : Per capita income growth has stalled over the year. This has direct implications for the budget with revenue importantly affected by weak nominal GDP growth. Second, with a stalling in income growth real demand may slow in coming quarters, which will impact on GDP growth over time…Some argue
Somebody shoot me. From John Edwards of the RBA: “House prices can’t increase indefinitely,” Mr Edwards said. “And people purchasing houses today on the expectation that they are going to increase indefinitely will be disappointed and possibly financially embarrassed by the outcome. …“If we thought the [housing] problem was sufficiently permanent and critical for us, we could
Why does Captain Glenn say one thing and do another? His speech today mostly makes sense and it’s good to see some pressure applied to governments to free up housing supply, yet the bubble keeps on growing… Glenn Stevens Governor Address to CEDA Luncheon Adelaide – 3 September 2014 Thank you for the invitation to visit Adelaide.
As expected the Reserve Bank Board decided to leave the cash rate unchanged at 2.50%. In the Governor’s statement he retained the key sentence “on present indications, the most prudent course is likely to be a period of stability in interest rates”. Surprisingly they changed the wording around the Australian dollar although the sentiment remains
No surprises: At its meeting today, the Board decided to leave the cash rate unchanged at 2.5 per cent. Growth in the global economy is continuing at a moderate pace. China’s growth remains generally in line with policymakers’ objectives, with weakening property markets a challenge in the near term. Commodity prices in historical terms remain
Tomorrow is the RBA’s September meet where the chances of either rate cut or rise are zero, even if the RBA shadow board want to be a little more circumspect about it: The picture of the Australian economy painted by the latest data is murky. The housing market and indicators of sentiment are strengthening but