Australian interest rates

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.

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Oh boy, is the RBA confused

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

12

RBA holds, nudges dollar

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,

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As the RBA meets, business lending dies

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

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Shadow RBA behind the curve

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

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Macroprudential back everywhere but here

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

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Goldman: RBA to cut in July

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

0

Bill Evans on the RBA minutes

Fresh from our Bill: The minutes of the monetary policy meeting of the Reserve Bank Board for May 6 depict a central bank which appears to be somewhat more dovish in May than we saw in April. This point is probably best exemplified by the language used to describe the “on hold” policy. In April

2

RBA minutes neither alert nor alarmed

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

11

Another bullhawk down!

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,

11

A beardove rises!

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

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The bond bull market that just won’t die

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

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Norway’s macroprudential lesson

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

3

Bloxo: Rate rise this year

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

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RBA to hold for two years?

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

6

Goldman: Macroprudential worth 50bps

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.

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Have Chinese investors ruined interest rates?

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

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Australia’s tumbling neutral cash rate

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

3

Bassanese sees rate cuts!

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

2

Bill Evans on the CPI and interest rates

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

9

Bullhawks strut their stuff

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