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.


CBA delivers double rate hike

From the AFR: CBA, the nation’s biggest mortgage lender, is raising rates for the second time in two weeks and reintroducing some fees. The bank is set to announce an increase of 47 basis points, or a rise to 4.73 per cent, on its three-year “special rate” investment loans. The rate on its owner-occupied “special rate” loan


RBA endorses CGT, negative gearing reform

Form Phil Lowe’s Friday apperance in Parliament: Mr THISTLETHWAITE: In May 2016, the ABC reported that there was an internal RBA briefing note under FOI that said, ‘Any change which discourages negative gearing may be good from a financial stability perspective.’ Is that still the view of the bank? Dr Lowe : The main point


APRA delivers threatening lettuce leaf to banks

Via Banking Day: APRA will insist on more consistent rules on the assessment – and reassessment of borrowers over loan serviceability, a measure intended to bolster other rules that, in effect, may restrain credit growth. In guarded language in a letter to all banks and ADIs yesterday, the Australian Prudential Regulation Authority said a revised


Are central banks really independent?

After yesterday’s suggestion that a brick would do as good a job as Phil Lowe at the RBA owing political sensitivities, Goldman Sachs offers this chart on central bank independence: The Goldman piece was about highlighting how the US Fed doesn’t actually have that many legal protections if Trump decides to test his powers. I


Bill Evans on the RBA minutes

From Bill Evans at Westpac: As expected, the minutes of the February monetary policy meeting of the Board of the Reserve Bank provided little additional insight to the Governor’s post-meeting statement and the February Statement on Monetary Policy. The surprise 0.5% decline in real GDP in the September quarter attracted considerable discussion although it has


Bill Evans tours Trumpland

A nice note here from Bill Evans at Westpac: For the last two weeks, I have been in the US visiting investors; hedge funds; corporates and officials. I still have more meetings to complete, including with other Fed officials, but I would like to set out some assessments so far. It will come as little


Is the interest only mortgage dying?

From Domainfax: Macquarie Bank property borrowers will have to disclose their spending on everything from footy to fashion under tough new credit rules about to be introduced. Borrowers seeking a loan will be asked for details on their spending in 12 separate categories covering household and discretionary spending to asses eligibility for a loan. The


BankWest (CBA next) kills negative gearing for loans

Oh dear! Via the AFR: Bankwest is set to rock the $1 trillion mortgage market and more than 1.5 million property investors by axing negative gearing benefits that drive lucrative residential property investment, particularly in Melbourne and Sydney. The bank – owned by Commonwealth Bank of Australia, the nation’s largest mortgage provider – will announce on Monday that generous


RBA sees futureboom!

From Bubble-o-Phil today: To this: This year’s growth has been shredded but worry not, the RBA always has a future boom at hand and despite a poor H1 this year, H2 is going to rocket to deliver an unchanged result of 3%. How? Overall, the forecasts for year-ended GDP growth are lower over the next


Bloxo turns to rate hikes

From Bloxo: The tailwind is here. Higher commodity prices are boosting national incomes and the numbers are large. Export values rose by a strong 32% y-o-y in December which drove the largest trade surplus on record. This is driving a strong rise in mining profits and tax revenues. The debate is about whether the lift


Another RBA governor held hostage by specufestors

“Backbone” Phil as I call him yesterday delivered the most forceful hold in interest rates that I can recall in weak circumstances: Conditions in the global economy have improved over recent months. Business and consumer confidence have both picked up. Above-trend growth is expected in a number of advanced economies, although uncertainties remain. In China,


Bill Evans turns dovish

From Westpac’s Bill Evans: As expected the Reserve Bank Board decided to hold the overnight cash rate unchanged at 1.5%. The commentary in the Governor’s statement was a little more upbeat than had been the case in December. In particular the global view has been lifted from global growth “lower than average” to “growth above


RBA holds assertively

No hint of easing here: At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent. Conditions in the global economy have improved over recent months. Business and consumer confidence have both picked up. Above-trend growth is expected in a number of advanced economies, although uncertainties remain. In China,