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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CBA joins rate hike stampede

From the AFR: Commonwealth Bank of Australia, the nation’s largest lender, is increasing rates on fixed term owner occupied and investment loans by up to 65 basis points, the latest of the majors to respond to rising international funding costs caused by the ‘Trump effect’, tougher underwriting standards and tighter rules. The increase means a

17

Bill Evans begs for no more rate cuts

From Westpac’s Bill Evans: The Reserve Bank Board meets next week on December 6. The Board is certain to keep rates on hold despite the prospect of a weak print for GDP growth in Australia in the September quarter. Westpac’s current estimate is 0.2% – the lowest since March quarter 2011. It appears that the

1

Warning: Iron ore rate hikes!

So say the OECD, via the AFR: The Reserve Bank of Australia is being urged by the Organisation for Economic Co-operation and Development to prepare the nation for official interest rate increases in 2017 to avoid a housing market blowout. Lamenting the Turnbull government’s failure to be more bold on tax reform – including by widening

4

Aussie bonds price two rate hikes!

The Aussie bond selloff is still going great guns this morning with yields breaking out to new highs across the curve: Unlike the US, the curve is still steepening here too as the bulk bubble persists: With the two year at 1.89bps it is now tilting towards two rates hikes through 2018 now. More selling

13

Brace for a round of out-of-cycle mortgage rate hikes

From the AFR: Lenders are raising the cost of buying property by up to 60 basis points as the impact of the ‘Trump effect’ and growing expectation that central bankers are set to end the era of record low rates ripples through global markets. Rising costs of funding debt are also widening the competitive gap

2

Checking in on the bondcano

Still more of a whimper than a bang. Local yields remain firmly in downtrend: Although the curve has steepened sharply offering some hope for better growth: US yields look a bit more promising for a reversal in trend: The curve has bounced but remains unimpressed with the growth outlook despite Trump stimulus: And US/ Australian

24

Macquarie slashes Aussie growth forecast

Fascinating from Macquarie:  We have updated our economic, currency and interest rate outlook for Australia following the US election  as part of our November Global Macro Outlook. Outlook  GDP outlook: We have downgraded our Australia GDP outlook in concert with our US economists; downgrade to the US growth trajectory. The key impact channel

16

Banks hike fixed-rate mortgages on Trump effect

The AFR is reporting mortgage rate hikes: Firstmac, the nation’s biggest non-bank lender, and nine other smaller lenders are discreetly raising fixed-rate mortgages by up to 45 basis points in a move expected to be followed by others as the “Trump effect” begins to bite local borrowers, according to lenders and market analysts. “International funding

6

Trump bondcano builds

Sheesh, big gap opens this morning for US bonds and not up! The USD has torn to new highs as well. On the longer term charts the long end of the bond curve is getting flogged: That down trend looks like it wants to reverse! Australia is following: And slopes for both are steepening fast:

4

Vimal Gor: Stay long Aussie bonds

Cross-posted from Vimal Gor at BT: October was a very volatile month as a number of issues jostled for top billing. First we had the preannouncement of the Brexit Article 50 lodging date from the UK, which saw considerable weakness in Sterling and later in the month a flash crash. The UK is being watched

4

Why the labour market is weaker than it looks

By Leith van Onselen Friday’s Statement of Monetary Policy (SoMP), released by the Reserve Bank of Australia (RBA), expressed concern at the underlying weakness of the Australian labour market, where nearly all of the recent jobs growth has been part-time and significant underemployment appears entrenched: The unemployment rate continued to decline in the September quarter