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.


The great inflation delusion

Via Dr Ed Yardeni: The Fed, the European Central Bank (ECB), and the Bank of Japan (BOJ) came up with lots of headline-grabbing shock-and-awe programs over the past 10 years in reaction to the Great Financial Crisis. Over time, they seemed to lose their effectiveness and ability to shock or awe. Nevertheless, the US economy


Recessionberg demands QE

No QE says monetary curmudgeon Stephen Grenville: QE1 was a powerful instrument in rescuing key financial markets which had frozen, but this experience has no relevance for Australia in the foreseeable future. When the current monetary system was put in place in Australia in the 1980s, ‘free markets’ were the lodestone of policy. The RBA


Another APRA head goes as failed Byers hangs on

Via the AFR over the weekend: The Australian Prudential Regulation Authority is looking for a new head of policy and advice, following the resignation this week of Pat Brennan, who had responsibility for developing the regulator’s policies on banks, insurers and super funds. Mr Brennan’s surprise resignation after more than eight years at APRA creates


Aussie bonds howl crisis!

Aussie long bonds are insane. At all time low yields again today: The curve is now inverted all the way out past the 15 year: The last time this happened was the depths of the European debt crisis. Yet US yields are crashing even faster and spreads appear to have bottomed: That’s partially thanks the


Lunatic RBA begins to freak out

From the Lunatic RBA just now: Risks to the Outlook Guy Debelle, Deputy Governor Today I am going to talk about some of the key risks around the outlook for the Australian economy. I will draw on the material published last week in the August Statement on Monetary Policy. On the global side, I will discuss


Lunatic RBA sees green shoots everywhere

Via the Lunatic: The Usual Transmission – Monetary Policy and Financial Conditions Christopher Kent[*]Assistant Governor (Financial Markets) Address to Finance & Treasury AssociationSydney – 13 August 2019 Introduction I’d like to start by thanking the Finance and Treasury Association for the opportunity to speak to you today about the transmission of monetary policy. In my current position


Lunatic RBA on QE options

Via the Lunatic RBA’s recent appearance in Parliament: It’s possible that we end up at the zero lower bound [for the cash rate]. I think it’s unlikely, but it is possible. We are prepared to do unconventional things if the circumstances warranted it. I hope we can avoid that. So what are the unconventional options?


All new highs for Aussie bonds

Yawn! This making money business is getting boring. More record highs at the long end of the Aussie bond curve: The curve continues to flatten and warn of elevated recession risks. The 15 year is only 5bps from inversion: But the long end is being dragged down by a rampant US bond market so the


Deutsche: Three more rate cuts by year end

Via Deutsche comes a dove taking flight in the shape of Phil Odonahoe with rate cuts forecast for Sept, Oct and Nov: “The recent escalation of trade tensions have materially increased the probabilities of a global recession.” “We think delivering 75bps of easing pre-emptively circumvents the risk of having to deliver 100bps of easing and


Bond bull at the extremes

Via the excellent Damien Boey at Credit Suisse: Over the past few weeks, the bond rally has taken us to uncharted territory. It is not so much that global bond yields are pushing record lows. It is not so much that a significant portion of investable government debt around the world is now offering negative


Lunatic RBA babbles insanely in Parliament

Via Phil Lowe in Parliament today: Thank you for this opportunity to share our views on the Australian economy and the RBA’s important public policy responsibilities. My colleagues and I strive for a high level of transparency and these hearings are an important part of the accountability process. Later this morning, we will be releasing


The RBA WILL be forced to follow the RBNZ

Via Damien Boey at Credit Suisse: The RBNZ has surprised, by cutting rates 50bps at its meeting today. Further, Governor Orr has given some fairly dovish guidance, mentioning that the Bank has done its homework on unconventional easing measures, such as outright asset purchases. The AUD and Australian bond yields are following the NZD and


Bill Evans: RBA to keep on cutting

From Bill Evans of Westpac: As expected, the Reserve Bank Board decided to leave the cash rate unchanged at 1.00% at today’s Board meeting. In terms of the signalling of future policy, we were most interested as to whether the final sentence in the Governor’s decision statement would retain the wording “ease monetary policy further


Shadow RBA lost in the dark

From The Shadow: Strong Conviction that Rates Need to Stay Put: Shadow Board Australia’s inflation rate, at 1.6% (June quarter), 0.3 percentage points higher than in the March quarter, remains well below the Reserve Bank of Australia’s official target range of 2-3%. The unemployment rate is firm at 5.2%. The RBA Shadow Board’s conviction that


Bill Evans: RBA to hold next week

Via Bill Evans of Westpac: The Reserve Bank Board meets on August 6 to consider whether to extend the sequence of rate cuts in June and July for another month. We think it is quite unlikely that the Board will decide to do a third consecutive cut at this meeting. Following the cut in July,


OMG, Aussie bonds

The rally roared higher as RBA cuts shifted forward on the trade war with yields at record lows across the curve: The curve is now inverted right out past the 7 year. The long end is flattening fast. Indeed the cash rate to 10 year is nearly inverted: Spreads to the US actually tightened as its


Foghorn: RBA to hold next week

Via Terry Mccrann, RBA fogorn: First the big points. The overall inflation numbers were low and unsurprising. They didn’t “demand” another interest rate cut from the Reserve Bank and the RBA will duly leave its rate unchanged at Tuesday’s meeting. We’ve had two cuts in successive months and the banks have passed on most of


Private sector credit is bottoming

Via Damien Boey of Credit Suisse on yesterday credit aggregates: Private sector credit was materially softer than expected, barely rising 0.1% in June, with downward revisions to prior months’ data. Year-ended growth has slowed to 3.3% from 3.6%. Compositionally, weakness in business and personal credit lines underpinned the downside surprise. The story here seems to


Time to bail on the bond rocket?

New highs again to day for the Aussie bond rocket: The curve keeps flattening despite RBA cuts: And spreads to the US are all at or near records as well: Westpac hints at taking profits: We think it can get there but the period of extend AU bond outperformance is over. As mentioned, Westpac’s decision