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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The future of central banking

Find below a one hour and 20 minutes keynote from the weekend’s Institute of New Economic thinking in Hong Kong. The subject of the keynote is central banking in the modern era covering many topics that will be of interest to MacroBusiness readers including fiscal-monetary co-ordination, QE, balance-sheet recession dynamics, macro-prudential regulation, the effect of

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RBA holds, retains easing bias

The RBA decided to hold today and again retained its easing bias: Statement by Glenn Stevens, Governor: Monetary Policy Decision At its meeting today, the Board decided to leave the cash rate unchanged at 3.0 per cent. Global growth is forecast to be a little below average for a time, but the downside risks appear

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Hold rates, tax hot money

Cross-posted from Henry Thornton. THE Reserve Bank is widely expected to leave cash rates unchanged today, a judgment with which I agree. Global conditions are looking better, though attempts to solve the Cyprus crisis involving theft of bank deposits has created a nasty precedent. Local economic conditions are looking better, but the labour market is

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The disappointing Philip Lowe

Yesterday’s set of RBA speeches were very disappointing. They confirmed that Australia will plod down the same weary path of financial repression that the rest of the Western world is so enjoying. But they were disappointing for a second reason. The major speech of the day was delivered by Deputy Governor Philip Lowe, heir apparent

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Westpac hikes fixed rates

From AAP: Westpac Banking Corporation Ltd has increased its fixed interest rate on a two-year loan, in a move that has fuelled speculation the lender is expecting an end to the Reserve Bank of Australia’s monetary easing cycle. In February, Westpac reduced its rate on a two-year fixed-term home loan to 4.99 per cent per

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Shadow RBA says rates to rise

The AFR has today’s ruminations from the Shadow RBA Board: Official interest rates are more likely to be higher in 12 months’ time, according to a group of prominent central banking academics and economists. The group urged policymakers to keep the official cash rate on hold at 3 per cent when it meets on Tuesday. …The

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Specufestors vs industry

While the two leaders of Australia’s political parties are busy stroking racist sentiment in Western Sydney, the RBA meets today and will very likely not cut interest rates despite a manufacturing capex reading last week first seen in 1989 (in nominal dollars, real dollars being FAR worse).  It’s not that the RBA would not like

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RBA shies from macroprudential tools

Find below a neat speech from the RBA’s Guy Debelle this morning. It’s a great primer on the practicalities of monetary policy dynamics. Of most interest, Debelle closed with the following statement: As some of this quantitative easing generates capital outflows from the country doing the easing, the exchange rate depreciates, boosting local economic activity.

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European crisis ends for banks

Banking Day this morning reported that: Commonwealth Bank tapped into the resurgent mortgage-backed securities market, with a deal that was upsized from A$750 million to $2.3 billion. On Friday, the bank priced its latest RMBS issue, Medallion Trust Series 2013-1. It will pay 80 basis  over the bank bill swap rate on the $1 billion of A1 notes, which have a

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RBA Minutes show easing bias remains

Not much to add beyond the Governor’s last statement. The bank sees the peak in mining investment coming and does not believe the iron ore bounce is sustainable, as well as gradual improvements in interest rate sensitive sectors. It stands ready to cut if those sectors sputter. Minutes of the Monetary Policy Meeting of the Reserve Bank