Productivity Commission takes a swipe at banking regulators

From Clancy Yeates at The Age:

The Productivity Commission last month took aim at speed limits imposed on lending to property investors in 2014, and 2017 caps on interest-only lending, saying the policies were a “blunt intervention with detrimental effects on market competition”.

The commission’s draft report on competition in finance said regulators were putting too much emphasis on stability, and argued the watchdog’s loan caps had boosted big bank profits while making it harder for smaller banks to compete….

Bank regulators are “putting too much emphasis on stability” ??

I thought April 1st was next week.

Australia: RBA hands tied

Falling wage rate growth suggests that we are headed for a period of low growth in employment and personal consumption.

Australia Wage Index

The impact is already evident in the Retail sector.

ASX 300 Retail

The RBA would normally intervene to stimulate investment and employment but its hands are tied. Lowering interest rates would aggravate the housing bubble. Household debt is already precariously high in relation to disposable income.

Australia: Household Debt to Disposable Income

Like Mister Micawber in David Copperfield, we are waiting in the hope that something turns up to rescue us from our predicament. It’s not a good situation to be in. If something bad turns up and the RBA is low on ammunition.

Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. The blossom is blighted, the leaf is withered, the god of day goes down upon the dreary scene, and — and in short you are for ever floored….

~ Mr. Micawber in Charles Dickens’ David Copperfield

RBA stuck

Great slide from the NAB budget presentation:

RBA Interest Rates in a Cleft Stick

The RBA is in a cleft stick:

  • Raising interest rates would increase mortgage stress and threaten stability of the banking system.
  • Lowering interest rates would aggravate the housing bubble, creating a bigger threat in years to come.

The underlying problem is record high household debt to income levels. Housing affordability is merely a symptom.

There are only two possible solutions:

  1. Raise incomes; or
  2. Reduce debt levels.

Both have negative consequences.

Raising incomes would primarily take place through higher inflation. This would generate more demand for debt to buy inflation-hedge assets, so would have to be linked to strong macroprudential (e.g. lower maximum LVRs for housing) to prevent this. A positive offshoot would be a weaker Dollar, strengthening local industry. The big negative would be the restrictive monetary policy needed to slow inflation when the job is done, with a likely recession.

Shrinking debt levels without raising interest rates is difficult but macroprudential policies would help. Also policies that penalize banks for offshore borrowings. The big negative would be falling housing prices as investors try to liquidate some of their investments and the consequent threat to banking stability. The slow-down in new construction would also threaten an economy-wide down-turn.

Of the two, I would favor the former option as having less risk. But there is a third option: wait in the hope that something will turn up. That is the line of least resistance and therefore the most likely course government will take.

Did the RBA just signal the end of rate cuts?

From Jens Meyer:

Did the RBA just signal the end of rate cuts and no-one noticed?

Well, not exactly no-one. Goldman Sachs chief economist Tim Toohey reckons the speech RBA assistant governor Chris Kent delivered on Tuesday amounts to an explicit shift to a neutral policy stance.

Dr Kent spoke about how the economy has been doing since the mining boom, and in particular how its performance matched the RBA’s expectations.

Reflecting on the RBA’s forecasts of recent years, Dr Kent essentially framed the RBA’s earlier rate cut logic around an initial larger than expected decline in mining capital expenditure and subsequent larger than expected decline in the terms of trade, Mr Toohey said.

Having so closely linked the RBA’s easing cycle to the weakness in the terms of trade (and earlier decline in mining investment), Dr Kent’s key remark was to flag “the abatement of those two substantial headwinds” and highlight that this “would be a marked change from recent years”….

Source: Did the RBA just signal the end of rate cuts and no-one noticed?

Will the RBA cut interest rates in May?

From Justin Smirk at Westpac:

The headline CPI surprised in Q1 falling 0.2% compared to Westpac’s forecast for +0.4%….. The annual rate is now just 1.3%yr compared to 1.7%yr in Q4.

The core measures, which are seasonally adjusted and exclude extreme moves, rose 0.2% compared to the market’s expectation of 0.5% rise…. The annual pace of the average of the core inflation measures is now 1.5% from 2.0% in Q4 (Q4 was unrevised) and is the lowest print we have yet seen from this measure.

From Jens Meyer at The Age:

Today’s weak inflation numbers are a game changer for the Reserve Bank that will trigger a rate cut, says JPMorgan head of fixed income and foreign exchange strategy Sally Auld.

The investment bank now expects the RBA to cut by 0.25 percentage points next week and to follow this up with a further 25 basis points cut in August, taking the cash rate to 1.50 per cent.

Smirk disagrees:

…..But low inflation, on its own, is not a trigger for a rate cut. Sure, it unlocks the interest rate door for the RBA should it decide it needs to walk through that door as the Bank would not have to wait for another CPI update before doing so. However, it does not mean that the RBA will cut rates! A rate cut is dependent on local economic conditions demanding a rate cut. With unemployment on a new downtrend this is not so at the moment and we suggest that the RBA is waiting to see a new weaker trend in domestic activity and employment before it would embark on such a strategy.

Source: Australian 14 CPI 2016 | Westpac

Source: Three reasons for the Reserve Bank of Australia to cut official interest rates in May

RBA leaves official cash rate at 2pc

Jens Meyer quotes RBA governor Glenn Stevens:

While the decision to keep rates unchanged was widely expected, analysts were speculating that the governor would show some concern about the recent steep rise in the Australian dollar’s exchange rate, which gained nearly 12 per cent from its January lows to a peak of US77.23¢ last week.

Mr Stevens duly added a paragraph to this month’s statement, noting that the currency had appreciated “somewhat”.

“In part, this [the recent rise] reflects some increase in commodity prices, but monetary developments elsewhere in the world have also played a role,” he said, referring to recent monetary easing by other central banks including the Bank of Japan and the European Central Bank, as well as the decision by the US Federal Reserve to reduce the pace of interest rate hikes.

“Under present circumstances, an appreciating exchange rate could complicate the adjustment under way in the economy,” he added.

But anyone hoping for a stronger “jawbone” was disappointed and the Australian dollar shot up by about half a cent to the day’s high of US76.32¢, before falling back in late trade to around US76¢.

Central banks around the globe are destabilizing financial markets and the RBA responds with a polite acknowledgement at the end of its statement. Someone please tell the governor: If you want to run with the big dogs, you’ve got to learn to pee high.

Source: RBA leaves official cash rate at 2pc

RBA strategy: Fight fire with gasoline

This is just plain wrong.

Bulk Commodity Prices

The Australian economy is sitting atop an enormous housing bubble caused by credit expansion from 1995 to 2007. To counter the end of the mining boom, the RBA lowered interest rates to stimulate the economy. While this may be necessary to relieve pressure on borrowers, what we don’t need is another credit expansion. That would simply make the economy more unstable and increase the risk of a crash. Banks are moving to curb lending to speculators, with lower LVRs, but not fast enough in my view. We can’t afford a credit contraction, but the RBA needs to impose sufficient discipline to keep credit growth at/below the inflation rate — so that it gradually declines in real terms as the economy grows.

RBA targets mortgage lending

World wakes to APRA paralysis | Macrobusiness

Posted by Houses & Holes:

Bloomberg has a penetrating piece today hammering RBA/APRA complacency on house prices, which will be read far and wide in global markets (as well as MB is!):

Central banks from Scandinavia to the U.K. to New Zealand are sounding the alarm about soaring mortgage debt and trying to curb risky lending. In Australia, where borrowing is surging, regulators are just watching.

Australia has the third-most overvalued housing market on a price-to-income basis, after Belgium and Canada, according to the International Monetary Fund. The average home price in the nation’s eight major cities rose 16 percent as of June 30 from a May 2012 trough, the RP Data-Rismark Home Value Index showed.

“There’s definitely room for caps on lending,” said Martin North, Sydney-based principal at researcherDigital Finance Analytics. “Global house price indices are all showing Australia is close to the top, and the RBA has been too myopic in adjusting to what’s been going on in the housing market.”

Australian regulators are hesitant to impose nation-wide rules as only some markets have seen strong price growth, said Kieran Davies, chief economist at Barclays Plc in Sydney.

…“The RBA’s probably got at the back of its mind that we’re only in the early stages of the adjustment in the mining sector,” Davies said. “Mining investment still has a long way to fall, and also the job losses to flow from that. So to some extent, the house price growth is a necessary evil.”

…The RBA, in response to an e-mailed request for comment, referred to speeches and papers by Head of Financial Stability Luci Ellis.

…The RBA and APRA have acknowledged potential benefits of loan limits “but at this stage they don’t believe that this type of policy action is necessary,” said David Ellis, a Sydney-based analyst at Morningstar Inc. “If the housing market was out of control and if loan growth, particularly investor credit, grew exponentially then it’d be introduced.”

What do you call this, David:

ScreenHunter_3294 Jul. 14 11.51

Reproduced with kind permission from Macrobusiness

ASX 200 weakens but Aussie dollar strengthens

  • Aussie dollar strengthens.
  • Stocks weaken.
  • But ASX 200 VIX continues to indicate a bull market.

The Aussie Dollar is testing resistance at $0.94. Consolidation in a narrow band suggests continuation of the rally towards $0.97/$0.98. Recovery of 13-week Twiggs Momentum above zero suggests a primary up-trend, but we may see the RBA intervene to prevent this. They may need to follow the RBNZ, introducing macro-prudential controls (e.g. setting a maximum 80% LVR percentage), to take the steam out of the housing market while lowering interest rates to weaken the currency.

Aussie Dollar

The ASX 200 respected resistance at 5500 and is headed for a test of medium-term support at 5400. Reversal of 21-day Twiggs Money Flow below zero warns of medium-term selling pressure and a correction. Breach of 5400 is likely and would test support at 5300 and the rising trendline. Respect of 5400 is unlikely, but would suggest another rally to 5550.

ASX 200

* Target calculation: 5550 + ( 5550 – 5400 ) = 5700

ASX 200 VIX below 12, however, continues to indicate low risk typical of a bull market.

ASX 200

Norway teaches Britain how to choke house booms without killing economy – Telegraph Blogs

Ambrose Evans-Pritchard reports the resounding success of Norway’s central bank in using macroprudential tools to take the steam out of a housing bubble:

if the Bank [BOE] wishes to contain credit, it should learn from Norway’s success. Instead of raising rates, it has used “macroprudential” tools. It cut the loan-to-value ceiling on mortgages from 90pc to 85pc. It forced the banks to raise to capital buffers further.

The Norges Bank has recommended a 1pc counter-cyclical buffer based on its view of what constitutes a safe level of credit growth.

Contrary to claims that these tools never work, they worked splendidly, as you can see from this chart today from HSBC’s David Bloom.

Norway/UK House Prices

The RBNZ adopted similar measures and it is puzzling why the RBA, which faces an equal threat, is not doing the same.

Read more at Norway teaches Britain how to choke house booms without killing economy – Telegraph Blogs.

Henry Thornton | The recession we did not need to have

Henry Thornton expresses his opinion on the grim state of the Australian economy:

The Reserve Bank is widely expected to cut interest rates today. The economy is facing such a grim future that one can support such an outcome. But no-one, not even the Reserve Bank, is facing the main problem facing Australia, which is double-digit cost disequilibrium – a severe lack of international competitiveness.

Just like Treasury’s failure to be ahead of the curve in forecasting, the Reserve Bank’s apparent failure to understand our most important economic problem is bad news for all Australians….

Read more at Henry Thornton – The recession we did not need to have.

Hat tip to Houses & Holes at

Australia: RBA should emulate the Swiss

Australia is suffering a similar fate to Switzerland, where the Swiss Franc soared against the Euro during the Eurozone sovereign debt crisis. Flight to safety caused the Franc to rocket, threatening local manufacturing industry. Exporters were priced out of international markets while imports were undercutting local suppliers. The Swiss National Bank (SNB) did not sit on its hands but pledged to maintain an effective currency peg against the Euro. Catherine Bosley at Bloomberg writes:

The Swiss central bank pledged to keep up its defense of the franc cap after almost doubling its currency holdings to shield the country from the fallout caused by the euro zone’s crisis.

The Swiss National Bank cut its forecasts for inflation and said it will take all necessary measures to keep the “high” franc within the limit of 1.20 per euro……

The SNB, led by President Thomas Jordan, put the ceiling in place in September 2011 after investors pushed the franc close to parity with the euro and threatened to choke off growth. The central bank’s campaign to defend the cap has led to foreign currency holdings ballooning to more than 400 billion francs, almost three quarters of annual output. It spent 188 billion francs on interventions last year, 10 times the 2011 amount.

Australia’s position is in some ways even worse than Switzerland. Not only do international investors increasingly view the Australian Dollar as a safe haven, with higher bond yields and a stable economy, but booming mining exports have caused a bad case of Dutch Disease — rising exports killing local manufacturing and service industries such as tourism and education.

Bulk Commodity Exports

While not suggesting that the RBA accumulate huge holdings of greenbacks and euros — these are depreciating currencies, with central banks engaged in widespread QE — but the idea of a sovereign wealth fund is appealing. Investing in international equities is a risky business that would cause most central bankers to tremble, but sovereign wealth funds have been successfully run by Norway, China, Abu Dhabi, Saudi Arabia, Singapore and others. Far safer than international equities would be to buy Australian international debt, targeting the roughly $400 billion owed to foreign investors by major Australian banks.

Net Foreign Liabilities

The appeal would be two-fold: eliminate currency risk while generating a stable return on investment.

Printing more dollars, whether you spend them locally or offshore, will normally increase inflation risk. But with high local savings rates and slowing rates of debt growth, deflationary pressures are rising. The only real inflationary pressure is from higher oil prices. So the RBA has room to maneuver.

A weaker Australian dollar would make exporters more competitive and rescue local manufacturers from international competition. Tourism and education, formerly major export earners, would hopefully recover from the belting they have taken in recent years. Miners would also not complain as a weaker dollar would boost profit margins.
Read more at SNB Keeps Up Franc Defense as Euro Crisis Risks Persist – Bloomberg.

The “Export Price Norm” saved Australia from the Great Recession « The Market Monetarist

The Market Monetarist writes how a combination of luck and good policy saved Australia from recession.

Milton Friedman once said never to underestimate the importance of luck of nations. I believe that is very true and I think the same goes for central banks. Some nations came through the shock in 2008-9 much better than other nations and obviously better policy and particularly better monetary policy played a key role. However, luck certainly also played a role…..

via The “Export Price Norm” saved Australia from the Great Recession « The Market Monetarist.

Warwick McKibbin on Australian interest rates and the fate of manufacturing

Professor Warwick McKibbin from ANU on the Australian economy, interest rates, the RBA and the fate of manufacturing:

Hat tip to Houses and Holes at

Westpac: RBA Statement on Monetary Policy

It appears that the objective of this Statement is to emphasise that without a significant deterioration in global financial conditions policy should remain unchanged. When you assess the various pieces of the Bank’s description of the domestic economy – weak employment; rising unemployment rate; subdued retail spending; soft housing market; below trend growth outside mining; scaling back of public investment; building construction subdued; inflation to remain around the mid-point of the target range; policy at neutral, not stimulatory – we see a fairly clear case for policy to move into the stimulatory zone immediately. Of course our forecasts as contrasted with the Bank’s forecasts clearly suggest that the qualitative descriptions provided in this statement are understating the need for a policy response.

It has been and remains our view that a further 50bps in policy easing can be justified immediately although our forecast is that this adjustment is likely to occur over a three to four month period. We find the use of the requirement that demand conditions need to weaken materially before a rate cut can be delivered overly conservative and expect that the Bank’s policy will change more rapidly than we assess is their current intention.

Consequently at this stage we maintain our view that the next rate cut in this cycle can be expected in March to be followed by a move in May but recognise that we are currently dealing with a central bank that while acknowledging all the reasons policy needs to be stimulatory appears to have no immediate intention to move.

Bill Evans
Chief Economist

Westpac Economic Update: RBA leaves rates unchanged

The Board of the Reserve Bank surprised us with a decision to hold the cash rate unchanged at 4.25%. Whilst this indicates that for the time being the Bank is assessing the risks somewhat differently to ourselves we are not inclined to change our core view that a further 50bps in easing can be expected over the course of the first half of this year.

Bill Evans
Chief Economist