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Donald Trump's tariffs have a large role to play in Australia's interest rates cycle

News.com.au

an hour ago

News.com.au

Donald Trump's tariffs have a large role to play in Australia's interest rates cycle

When the RBA handed down its most interest rate decision last month, it shocked economists and the public by holding the cash rate at 3.85 per cent. The widely held consensus had been strongly in favour of another 0.25 per cent cut to follow the previous one in May. In the weeks since the Reserve Bank's decision, economic data has been mixed, with some elements such as the recent retail sales report providing support for the RBA's message of caution, while on the other hand, the recent substantial rise in unemployment was far more supportive of the cash rate being cut. In several important ways the RBA's uncertainty about the path forward for interest rates is arguably justified. Trump, Trade And Global Uncertainty At a global scale, the implementation of the Trump Administration's various tariffs and threats of even greater trade barriers to nation's not willing to make a swift agreement with the United States remains a source of major questions for central banks around the world. The challenge posed by tariffs to the path of interest rates was recently summed up by JPMorgan Chase (the world's most valuable bank) CEO Jamie Dimon at an event hosted by the Irish government. 'The market is pricing a 20% chance (of rising interest rates). I would price in a 40-50% chance I would put that as a cause for concern,' Dimon said. Dimon went on to cite the Trump administration's tariffs, the restructuring of global trade and the growing U.S government budget deficit as inflationary forces impacting the path forward for interest rates. While U.S interest rates can and do rise and fall independently of those of other nations, they are also the most important global benchmark. Theoretically, the U.S Federal Reserve holding a higher interest rate than the RBA can have two major knock on effects for Australia. It can force a repricing of Australian interest rates to better reflect the global benchmark. Or if the RBA chooses to allow the distance between the RBA cash rate and the U.S federal funds rate to expand, it places downward pressure on the value of the Australian dollar in a vacuum. A Mixed Bag For Australia At a domestic level, there is also a high degree of uncertainty impacting the path forward for interest rates. With government currently the driving force behind broader economic growth and employment growth in generally taxpayer funded sectors of the economy (public administration, education and, healthcare and social assistance) the main driver of the resilience of the labour market, it's challenging for the RBA to know exactly when a rate cut would be appropriate. Meanwhile, the deeply mixed nature of retail sales growth depending on the lens with which it is viewed also complicates matters. For example, looking at the latest headline retail sales showing a 1.2 per cent rise in turnover or June in a vacuum, it would be hard to justify a rate cut. But when the focus is shifted to an inflation adjusted figure that looks at retail sales per working age adult, the data for the June quarter reveals a return to recession in per capita terms. This is due to expansion of the population, the vast majority of which is occurring via migration acting as more or less the only driver of the retail economy in aggregate. History And Market Pricing Based on RBA rate cut cycles seen in the last 35 years, where the cash rate has been cut by at least one percentage point, the average rate cut cycle sees mortgage rates fall by approximately 33.3 per cent. If we remove the rate cut cycles driven by major emergencies such as the Global Financial Crisis and the early 1990s recession, the average reduction in mortgage rates falls to 27.0 per cent. If we were to see a similar reduction in interest rates today, we would see a total fall in the cash rate of approximately 1.75 percentage points. This would leave the average payable rate on a variable mortgage for an owner occupier at 4.58 per cent. In terms of the pricing of the future path of interest rates from financial markets, the next full 0.25 per cent rate cut is priced in for the RBA's August meeting, with the next expected to follow in November. Overall, market pricing has interest rates falling by a total 1.33 percentage points, with the cash rate hitting a low of 3.02 per cent during the middle of next year. The Outlook For Rates While the direction of interest rates is ultimately in the hands of the Reserve Bank, under the current circumstances government is also playing a significantly greater role in influencing the path forward than has been historically normal. With the growth in the domestic consumer economy concentrated in the 65 and over age demographic and otherwise reliant on population growth, the level of migration set by the Albanese government will be vital in determining to what degree aggregate consumer demand is weak enough to warrant further cuts in interest rates. Meanwhile, the level of employment growth stemming from government policy will also be a key consideration. If the current pullback continues without a corresponding increase from the private sector, the urgency and magnitude with which the RBA approaches the ongoing rate cut cycle may intensify significantly. Ultimately, it's entirely possible that events beyond our shores end up playing a significant role in the direction of Australian interest rates, whether that be as a result of President Trump's tariffs or the Chinese economy slowing more swiftly than expected due to the ongoing trade conflict and still simmering domestic economic issues.

The $8.6 trillion bank tweak that risks sparking the next financial crisis

Sydney Morning Herald

2 hours ago

Sydney Morning Herald

The $8.6 trillion bank tweak that risks sparking the next financial crisis

Part of this is intentional and means banks around the world have an extra, easy-to-calculate buffer on top of the framework of other capital requirements that are linked to risk. However, America's biggest banks say the crude calculation stops them from snapping up US Treasuries during times of stress because doing so comes at too high a price. J.P. Morgan boss Jamie Dimon has warned that this blunt instrument means US Treasuries are branded 'far riskier' than the reality. 'These rules effectively discourage banks from acting as intermediaries in the financial markets – and this would be particularly painful at precisely the wrong time: when markets get volatile,' he wrote in his annual letter to shareholders. Scope for change US Treasury Secretary Scott Bessent is pushing for change and has claimed that tweaking Treasuries could drive US borrowing costs down, helping the world's biggest economy to service its mountain of debt. More importantly, it could help support US bonds at a time when foreign investors are increasingly losing faith. Ken Rogoff, the former chief economist at the International Monetary Fund, agrees that there's scope for change. He says: 'It is very hard to give a clear rationale for the SLR, which is essentially an extremely crude way to stop banks from over-leveraging and has led to all kinds of distortions in the market because large global banks can no longer perform simple arbitrage functions as they used to do.' Jerome Powell, the Federal Reserve chief who is currently at war with Trump over interest rates, is singing from the same hymn sheet as the president, describing it as 'prudent' to reconsider the rule given the growth in safe assets on bank balance sheets over the past decade. And so it begins. In June, the Fed proposed rule changes that would move away from a crude approach and instead tie the amount of capital banks must set aside to how important it is to the global financial system. The Fed also left the door open to bigger changes that would completely exclude low-risk assets such as Treasuries and central bank deposits from the leverage ratio calculation – as was the case during the pandemic – and invited feedback on whether this could be done as an 'additional modification'. As it stands, the changes are set to free up an extra $US5.5 trillion ($8.6 trillion) on bank balance sheets that can be put to work. The Fed estimated that capital requirements at the deposit-taking arms of the biggest banks would fall by an average of 27 per cent. However, the move to change the SLR and return to pre-crisis rules has proved highly controversial for those who lived through the last financial meltdown. Sheila Bair, who used to run the Federal Deposit Insurance Corporation (FDIC), which insures savers against losses in the event of a bank failure, warns that such a move is storing up trouble for the future. Loading After all, the collapse of Silicon Valley Bank (SVB) in the US and the firesale of its UK subsidiary to HSBC in 2023 was rooted in the SVB's purchases of US Treasuries. SVB had kept a large portion of depositors' cash in Treasuries, but as interest rates surged in the months leading up to its collapse, the value of these Treasuries plunged. The crisis that followed Liz Truss' mini-budget was also a crisis sparked by turmoil in the gilt market. 'Such a huge reduction will increase the risk of a [major] bank failure, exposing the economy to credit disruptions and exposing the FDIC and banking system to substantial losses,' Bair warns. 'I led the FDIC during the 2008 financial crisis and remember well how insured banks, with their higher capital requirements, ended up being a source of strength for the holding companies, not the other way around. 'The idea that somehow this freed-up capital will ... make its way back down to the insured banks in a crisis isn't grounded in reality.' Bair isn't the only one who's expressed concern. Fed governor Michael Barr, who served as the central bank's top bank regulator before stepping down in the face of pressure from the Trump administration, warned that the central bank's proposals would 'significantly increase' the risk of a big bank failure. Bair's big fear is that the money won't end up being funnelled back into boring bonds at all, but end up lining shareholders' pockets or in more exotic investments. She says: 'Banks will likely find a way to distribute some of it to shareholders, or otherwise deploy it into their market operations which are riskier and more vulnerable to crisis conditions than insured banks.' COVID buffer Those who back removing Treasuries from the calculations highlight that it was done during the pandemic without much fanfare as banks ploughed more money into bonds. However, analysts at Morgan Stanley have highlighted that this was in part a function of a 21 per cent jump in bank deposits as workers had nowhere to spend their cash during lockdowns. Morgan Stanley recently noted: 'The COVID-related surge in deposits means that 2020-21 is not comparable with today's environment, as deposit growth is tepid at 1 per cent year on year. Deposit growth, combined with loan demand, are key drivers of bank demand for securities as banks will prefer to use deposits to support client lending activity and build client relationships.' Loading Bair says capital buffers were put there for a reason. 'If there should be a future crisis, regulators have the authority to provide emergency temporary relief,' she says. '[If they] reduce capital requirements now, they don't know how banks may deploy it. Better to maintain strong requirements in good times so capital cushions will be there when bad times hit.' British regulators are also keeping a close eye on things amid concerns the UK is moving towards a world where sovereign risk is completely removed from the leverage ratio. While the UK has already taken steps to remove central bank reserves from its calculations, officials believe removing government bonds would be a step too far. Rogoff, now a Harvard professor, agrees that capital buffers have served their purpose during times of crisis.

The Age

2 hours ago

The Age

The $8.6 trillion bank tweak that risks sparking the next financial crisis

Part of this is intentional and means banks around the world have an extra, easy-to-calculate buffer on top of the framework of other capital requirements that are linked to risk. However, America's biggest banks say the crude calculation stops them from snapping up US Treasuries during times of stress because doing so comes at too high a price. J.P. Morgan boss Jamie Dimon has warned that this blunt instrument means US Treasuries are branded 'far riskier' than the reality. 'These rules effectively discourage banks from acting as intermediaries in the financial markets – and this would be particularly painful at precisely the wrong time: when markets get volatile,' he wrote in his annual letter to shareholders. Scope for change US Treasury Secretary Scott Bessent is pushing for change and has claimed that tweaking Treasuries could drive US borrowing costs down, helping the world's biggest economy to service its mountain of debt. More importantly, it could help support US bonds at a time when foreign investors are increasingly losing faith. Ken Rogoff, the former chief economist at the International Monetary Fund, agrees that there's scope for change. He says: 'It is very hard to give a clear rationale for the SLR, which is essentially an extremely crude way to stop banks from over-leveraging and has led to all kinds of distortions in the market because large global banks can no longer perform simple arbitrage functions as they used to do.' Jerome Powell, the Federal Reserve chief who is currently at war with Trump over interest rates, is singing from the same hymn sheet as the president, describing it as 'prudent' to reconsider the rule given the growth in safe assets on bank balance sheets over the past decade. And so it begins. In June, the Fed proposed rule changes that would move away from a crude approach and instead tie the amount of capital banks must set aside to how important it is to the global financial system. The Fed also left the door open to bigger changes that would completely exclude low-risk assets such as Treasuries and central bank deposits from the leverage ratio calculation – as was the case during the pandemic – and invited feedback on whether this could be done as an 'additional modification'. As it stands, the changes are set to free up an extra $US5.5 trillion ($8.6 trillion) on bank balance sheets that can be put to work. The Fed estimated that capital requirements at the deposit-taking arms of the biggest banks would fall by an average of 27 per cent. However, the move to change the SLR and return to pre-crisis rules has proved highly controversial for those who lived through the last financial meltdown. Sheila Bair, who used to run the Federal Deposit Insurance Corporation (FDIC), which insures savers against losses in the event of a bank failure, warns that such a move is storing up trouble for the future. Loading After all, the collapse of Silicon Valley Bank (SVB) in the US and the firesale of its UK subsidiary to HSBC in 2023 was rooted in the SVB's purchases of US Treasuries. SVB had kept a large portion of depositors' cash in Treasuries, but as interest rates surged in the months leading up to its collapse, the value of these Treasuries plunged. The crisis that followed Liz Truss' mini-budget was also a crisis sparked by turmoil in the gilt market. 'Such a huge reduction will increase the risk of a [major] bank failure, exposing the economy to credit disruptions and exposing the FDIC and banking system to substantial losses,' Bair warns. 'I led the FDIC during the 2008 financial crisis and remember well how insured banks, with their higher capital requirements, ended up being a source of strength for the holding companies, not the other way around. 'The idea that somehow this freed-up capital will ... make its way back down to the insured banks in a crisis isn't grounded in reality.' Bair isn't the only one who's expressed concern. Fed governor Michael Barr, who served as the central bank's top bank regulator before stepping down in the face of pressure from the Trump administration, warned that the central bank's proposals would 'significantly increase' the risk of a big bank failure. Bair's big fear is that the money won't end up being funnelled back into boring bonds at all, but end up lining shareholders' pockets or in more exotic investments. She says: 'Banks will likely find a way to distribute some of it to shareholders, or otherwise deploy it into their market operations which are riskier and more vulnerable to crisis conditions than insured banks.' COVID buffer Those who back removing Treasuries from the calculations highlight that it was done during the pandemic without much fanfare as banks ploughed more money into bonds. However, analysts at Morgan Stanley have highlighted that this was in part a function of a 21 per cent jump in bank deposits as workers had nowhere to spend their cash during lockdowns. Morgan Stanley recently noted: 'The COVID-related surge in deposits means that 2020-21 is not comparable with today's environment, as deposit growth is tepid at 1 per cent year on year. Deposit growth, combined with loan demand, are key drivers of bank demand for securities as banks will prefer to use deposits to support client lending activity and build client relationships.' Loading Bair says capital buffers were put there for a reason. 'If there should be a future crisis, regulators have the authority to provide emergency temporary relief,' she says. '[If they] reduce capital requirements now, they don't know how banks may deploy it. Better to maintain strong requirements in good times so capital cushions will be there when bad times hit.' British regulators are also keeping a close eye on things amid concerns the UK is moving towards a world where sovereign risk is completely removed from the leverage ratio. While the UK has already taken steps to remove central bank reserves from its calculations, officials believe removing government bonds would be a step too far. Rogoff, now a Harvard professor, agrees that capital buffers have served their purpose during times of crisis.

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Donald Trump's tariffs have a large role to play in Australia's interest rates cycle

The $8.6 trillion bank tweak that risks sparking the next financial crisis

The $8.6 trillion bank tweak that risks sparking the next financial crisis

Wall Street rises after strong US GDP data

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Donald Trump's tariffs have a large role to play in Australia's interest rates cycle

The $8.6 trillion bank tweak that risks sparking the next financial crisis

The $8.6 trillion bank tweak that risks sparking the next financial crisis

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