The RBA’s Head of Financial Stability, Luci Ellis, gave a speech yesterday that included reference to macroprudential tools and made absolutely no sense: At this point I should probably mention macroprudential policy. By now it should be clear that the Australian authorities’ views on this supposedly new toolkit are a bit different from those 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.
The Reserve Bank of Australia has released its June decision and it’s deadpan except for one extra reference to the dollar (which it ignored and hardly budged): 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,
Today’s RBA meeting might should begin with a minute’s silence for the death of business lending. From the AFR: …new analysis of official figures from UBS shows almost all of the net credit growth since 2012 has flowed into property, as opposed to new productive plant or equipment. The research by banking analyst Jonathan Mott
Here’s the latest from the Shadow RBA which continues to sorely disappoint in the scope of it operations: The Australian economy remains in limbo. While non-mining businesses appear to strengthen and the labour market is holding up, consumer confidence has taken a hit after the Coalition government’s first budget a fortnight ago. Furthermore, revisions to
From the FT’s Gillian Tett today: …from the 1980s, it became fashionable to presume that macroeconomic management sat in a different silo from financial regulation: the former was dominated by debates about inflation targets and interest rates; the latter focused on bank supervision. Now the pendulum is swinging again. This week, Mark Carney, governor of
From Goldman Sach’s Tim Toohey, Andrew Boak and Philip Borkin and their assessment of yesterday’s RBA minutes: While there were no major changes within today’s Board Minutes, we do sense a slightly more cautious tone in some respects. Specifically, the RBA has highlighted that the recent strong growth in exports will not be sustained, that
The RBA minutes are out and feel pretty dated already. Here’s the conclusion: Members noted that there had been little change in the outlook for the global economy, with growth of Australia’s major trading partners in the year ahead still forecast to be around average. The latest data received on the domestic economy had evolved
Falling like feathered ninepins now. From Bloxo today: Driving a car with a broken shock absorber can be quite an unpleasant experience. Every bump in the road can be felt. For Australia’s economy, its key absorber of global economic shocks has been the AUD. Without large ups and downs in the AUD in recent years,
From Australia’s highest flying bullhawk today: Indeed it is time and I very much look forward to Kouk joining the beardove ranks. But, we should take a last look back at a soaring bullhawk before we move on. Kouk predictions 2014: As is normal at this time of the year, economists are pretty much compelled
I’ve been waiting for some bullhawkian budget replies but so far have been more impressed by the silence. Yesterday The Kouk posted an argument on how large a government Tony Abbott intends run: Mr Hockey’s first budget allows me to update my ‘size of government’ comparison, which I first published on 1 May 2014. It
Late last year, Andy Haldane, one the smarter eggs at the Bank of England declared: …the central bank’s new financial policy committee is taking too long to force banks to hold more capital and appeared to criticise the bank’s culture under outgoing governor Sir Mervyn King. Haldane told the Treasury select committee that the bursting of
From Ambrose Evans-Pritchard today comes a lesson for the RBA from the UK and Norway: British house prices have fallen 6pc since peaking in November 2007 at an average of £181,618. The average in March this year was £169,124, according to the Land Registry. This is based on hard sales data, unlike the asking price
From the SMH blog: Commonwealth Bank forecasts maintain the Reserve Bank is on track to raise interest rates in the fourth-quarter of 2014, and again in the first-quarter of 2015. The beginning of an upward cycle in interest rates will ensure fresh support for the currency and could put it on track to repeat parity against
NAB today dropped its forecast for one final rate cut and now expects rate rises late next year. From the SMH blog: The bank’s economists explain the review: Reasons are 1) the economy has been better than we expected and 2) the RBA have made it plain they are reluctant to cut what they already think is a
Here’s Bloxo in what I consider to be serious premature celebration: Australia’s labour market is improving and the jobless rate now seems to be passed its peak. Employment rose by +14k jobs (market had +9k; HSBC had +15k) which was enough to hold the unemployment rate steady at 5.8% (market and HSBC had 5.9%). This
Fresh from our Bill. As expected the Board decided to leave the cash rate unchanged at 2.5%. There were only minor changes in the Governor’s compared to the statement following the April Board meeting. We were most interested in the rhetoric around the Australian dollar given that in December it was referred to as “uncomfortably
The Reserve Bank of Australia (RBA) has released its monetary policy decision for May this afternoon. Here’s the statement: At its meeting today, the Board decided to leave the cash rate unchanged at 2.5 per cent. Growth in the global economy was a bit below trend in 2013, but there are reasonable prospects of a
I was chatting to my bank manager yesterday about today’s RBA meeting and he made the point that customers are beginning to reckon on interest rate rises later this year. August was the hottest bet. It’s a good month to finger because the bullhawks may be screetching for a hike at that point. The June
Goldman Sachs is out with a study of the effects of macorprudential policy on house prices, via FTAlphaville: Relative to their previous peaks, nominal house prices are now 43%higher in Norway, 20% higher in Canada, 14% higher in Israel and 7%higher in Australia. …In Canada, nominal house prices did not fall much during the GFC and have risen steadily since 2009.
That’s what UBS regional chief investment officer Asia Pacific Kelvin Tay reckons: “Chinese buyers won’t be deterred by marginally higher interest rates. They are buying properties with mostly cash. Australia has had a spate of robust capital city housing data in recent months, but Chinese buyers have been pushing prices up. Rate hikes will now be
A note today from CBA will raise a few eyebrows. Via Banking Day, Commonwealth Bank economist Gareth Aird argues: “The neutral cash rate is the interest rate that would not exert expansionary or contractionary force on the economy. Changes in productivity, the terms of trade, savings behaviour, fiscal policy, credit growth, lending margins and the
The IMF is out with its regional report on Asian economies and it included an examination of the efficacy of macroprudential tools in Asia. It finds attempts to offset capital flows were pretty useless but on housing it worked well: Macroprudential instruments have been used more extensively in Asia than in other regions. This has
According to David Bassanese: As a result, the RBA is likely to remain comfortable in retaining its neutral policy bias. Indeed, if the Australian dollar remains uncomfortably high and business confidence continues to wind back, the RBA remains well placed to even consider a return to an easing policy bias. To my mind, the RBA
Fresh from our Bill: This number will come as a positive surprise for the RBA. Recall that following the 0.9%qtr print for underlying inflation for the December quarter they raised their forecast for underlying inflation to 3%yr from 2.5%yr. That implied they expected a probable 0.8%-0.9% print for March quarter underlying inflation. The implication is
From the Kouk: It would be a wild exaggeration to say that Australia has an inflation problem, but the March quarter CPI highlighted the fact that the strength of the domestic economy is spilling over into a somewhat uncomfortable acceleration in the inflation rate. While the March quarter inflation rates came in under market expectations
Over the weekend, Chris Joye responded to Terry McCrann’s impolitic attack of late last week and, in fairness, here it is from the AFR: Terry McCrann of the Herald Sun…had a panic attack when I questioned the hand that had fed him for so long. McCrann was once known as the “shadow governor” for reliably getting
I missed this yesterday, the cause of macroprudential took another serious blow after it was backed by the Pascometer: …if the strong dollar is restraining economic growth, it becomes much harder for the RBA to lift rates if they only reason is the perception that housing prices are rising too far, too fast. Which in