I’ve argued for almost two years that there is no cause to worry about inflation preventing rate cuts in Australia. And all things being equal that’s likely to continue. The problem is that I don’t see things as remaining equal. As we go over the mining investment cliff and the terms of trade continues to
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 the ANZ today: Thermal coal prices gained, while coking coal prices declined to USD148/t. China coal import data showed thermal coal imports rose 25% to 16mt in March, with most of the gains in imports from Indonesia. Reports suggest Australia lost some of its market share to Indonesia as a supplier of high rank
Paul Bloxham is out again today with a new note which will bring cheer to the gloomy and yelps of joy to retailers. The Australian consumer is back, apparently, having concluded his/her eighteen months of disleveraging. Under the disconcerting title “It’s all part of the central bank’s game plan”, Bloxo declares: In our view, rising
Here are the RBA Minutes. Nothing new here. Will cut if need to yada, yada, yada… Minutes of the Monetary Policy Meeting of the Reserve Bank Board Sydney – 2 April 2013 Members Present Glenn Stevens (Chairman and Governor), Philip Lowe (Deputy Governor), Martin Parkinson PSM (Secretary to the Treasury), John Akehurst, Jillian Broadbent AO, Roger Corbett AO, John Edwards, Heather Ridout, Catherine Tanna
Warning, this post is touched with schadenfreude. There’s nothing quite like the now patented mid-year global slowdown to flip bear switch. Karen Maley at the AFR is first up: Ominously, analysts noted that the gold price has only suffered two sharp declines in the past five years, and both were at times of deep global
Find below the full text of a new Wikileaks cable from the US Embassy and Consul General after discussions with the RBA’s Malcolm Edey in early April 2009: 1. (U) This is joint ConGen Sydney and Embassy Canberra cable. Summary 2. (C/NF) The Reserve Bank of Australia has acted aggressively over the last six months
It will be no news to MB readers of course but rate cuts are suddenly back on. Although none of the happy economists that seems to hog the Australian media discussion is yet to admit it, global and local data and commodity prices are becoming more unfriendly to their optimistic projections. For those of the
Find below a one hour and 20 minutes keynote from the weekend’s Institute of New Economic thinking in Hong Kong. The subject of the keynote is central banking in the modern era covering many topics that will be of interest to MacroBusiness readers including fiscal-monetary co-ordination, QE, balance-sheet recession dynamics, macro-prudential regulation, the effect of
Find below two interest rate arguments that summarise where the economy and monetary policy is at. My own views are at the end. And no, I will not be lowering my trousers. First, the bearish case from Westpac: RBA holds rates steady; but retains easing bias; next move down As expected the Reserve Bank Board
The RBA decided to hold today and again retained its easing bias: Statement by Glenn Stevens, Governor: Monetary Policy Decision At its meeting today, the Board decided to leave the cash rate unchanged at 3.0 per cent. Global growth is forecast to be a little below average for a time, but the downside risks appear
Cross-posted from Henry Thornton. THE Reserve Bank is widely expected to leave cash rates unchanged today, a judgment with which I agree. Global conditions are looking better, though attempts to solve the Cyprus crisis involving theft of bank deposits has created a nasty precedent. Local economic conditions are looking better, but the labour market is
From time to time Australian regulators indulge in a bit of hand-wringing over the high dollar. When they do so they usually also blame the overvalued currency on the forces beyond their control, such as uber-low interest rates in funding currency nations such as the US. Well, last night, speaking at the London School of
Yesterday’s set of RBA speeches were very disappointing. They confirmed that Australia will plod down the same weary path of financial repression that the rest of the Western world is so enjoying. But they were disappointing for a second reason. The major speech of the day was delivered by Deputy Governor Philip Lowe, heir apparent
From AAP: Westpac Banking Corporation Ltd has increased its fixed interest rate on a two-year loan, in a move that has fuelled speculation the lender is expecting an end to the Reserve Bank of Australia’s monetary easing cycle. In February, Westpac reduced its rate on a two-year fixed-term home loan to 4.99 per cent per
Last night the RBA delivered an interesting sermon on property prices that shows that despite an obvious reluctance to cut interest rates, the bank will not avoid the same path of lower rates for longer that we see in other nations. Nor will there will be policy innovation in the delivery of those rates. And
Firstly, let me make it plain that what is happening in the US economy in the first few months of the year is absolutely no surprise. The first quarter of each year of the past four has been the best and I expect the same this year. My forecast since the year began has been
The RBA has elected to keep rate on hold as expected. Find the statement below, which the shows again that the easing bias remains in place. Statement by Glenn Stevens, Governor: Monetary Policy Decision At its meeting today, the Board decided to leave the cash rate unchanged at 3.0 per cent. Global growth is forecast
The AFR has today’s ruminations from the Shadow RBA Board: Official interest rates are more likely to be higher in 12 months’ time, according to a group of prominent central banking academics and economists. The group urged policymakers to keep the official cash rate on hold at 3 per cent when it meets on Tuesday. …The
While the two leaders of Australia’s political parties are busy stroking racist sentiment in Western Sydney, the RBA meets today and will very likely not cut interest rates despite a manufacturing capex reading last week first seen in 1989 (in nominal dollars, real dollars being FAR worse). It’s not that the RBA would not like
Last night the Australian dollar fell to a new low in its recent decline to $1.02 before rebounding. The fall was encouraging because it was across nearly all of the crosses: It’s difficult to ascribe this to any one cause given the wild volatility in markets this week but the weakening currency can only have
Find below a neat speech from the RBA’s Guy Debelle this morning. It’s a great primer on the practicalities of monetary policy dynamics. Of most interest, Debelle closed with the following statement: As some of this quantitative easing generates capital outflows from the country doing the easing, the exchange rate depreciates, boosting local economic activity.
Banking Day this morning reported that: Commonwealth Bank tapped into the resurgent mortgage-backed securities market, with a deal that was upsized from A$750 million to $2.3 billion. On Friday, the bank priced its latest RMBS issue, Medallion Trust Series 2013-1. It will pay 80 basis over the bank bill swap rate on the $1 billion of A1 notes, which have a
Not much to add beyond the Governor’s last statement. The bank sees the peak in mining investment coming and does not believe the iron ore bounce is sustainable, as well as gradual improvements in interest rate sensitive sectors. It stands ready to cut if those sectors sputter. Minutes of the Monetary Policy Meeting of the Reserve Bank