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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Bill Evans on the RBA

From Bill Evans at Westpac: As universally expected, the Reserve Bank Board decided to keep the cash rate unchanged at 1.50%. The market was given a clear understanding of the Governor’s intentions when he commented to the House of Representatives Standing Committee on Economics: “The main effect [of a rate cut] would be more borrowing

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RBA holds, says nothing

RBA decision for March: At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent. Conditions in the global economy have continued to improve 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, growth

3

What would cutting the APRA investor loan limit do to banks?

Morgan Stanley takes a peak: We think regulators are increasingly likely to cut the 10% IPL speed limit given concerns on housing lending. This could slow total HL growth from ~6.5% to ~5%, with CBA and WBC most at risk given their recent strong IPL growth. However, all banks are likely to do further targeted

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The RBA must tighten if APRA does not

From the Shadow RBA today: Stronger than expected economic growth provides welcome news to the Australian people. Coupled with a lack of new data on inflation, the unemployment rate hardly moving and no clear direction for the global economy, the CAMA RBA Shadow Board’s conviction that the cash rate should remain at its current level

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How to hike mortgage rates for Sydney and drop them for Perth

From Domain: Philip Lowe has some high-powered backing if he leaves interest rates on hold Tuesday as widely expected. Days after the Reserve Bank of Australia governor signalled that rate cuts weren’t in the national interest amid record household debt, the securities regulator said it was looking at mortgage lending standards across the banking sector.

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Apartments to create CPI suckhole

Via Deutsche: From Q1-17, the ABS will add ‘attached dwellings’ (i.e. apartments and semis) to the measure of ‘new dwelling purchase’ in the CPI to better capture the trend towards higher-density living. We expect this to impart some modest downside pressure to headline CPI moving forward In the Q4-16 CPI release, the ABS noted its

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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

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RBA endorses CGT, negative gearing reform

Form Phil Lowe’s Friday appearance 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

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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

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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

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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

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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

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The very disappointing Phil Lowe

I was once a fan of Mr Lowe. He had a little chutzpah when he took on the Greenspan doctrine at the turn of the millennium. But, like so many in Australian public life, the institutional mincer grinds that out of you before you reach the top, via the AFR: Paul Dales from Capital Economics