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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RBA panic intensifies

From RBA boffin Christopher Kent today: Thank you for the opportunity to speak at this Bloomberg event today. I’d like to address some issues about how monetary policy decisions taken elsewhere influence interest rates here in Australia. Australia is a small open economy that is influenced by developments in the rest of the world. Financial

84

Politico-housing complex implodes

It is a laugh a minute now for the politico-housing complex. First up the RBA, which “economists” say was actually bullish last week: Economists believe the market misinterpreted comments by Reserve Bank of Australia deputy governor Guy Debelle, whose speech on Thursday was received as dovish but in fact was “frank” and consistent in substance

106

Kouk: RBA to slash rates, Australian dollar to crash

Via the Kouk today, given he and MB are the only ones to have gotten this right: In the wake of the September quarter national accounts, and with accumulating information on house prices, dwelling investment, the global economy and spare capacity in the labour market, I have revised my outlook for official interest rates. For

22

RBA holds, yawn

The RBA is out with its latest hold. The statement: At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent. The global economic expansion is continuing and unemployment rates in most advanced economies are low. There are, however, some signs of a slowdown in global trade, partly stemming from ongoing

9

Captured APRA to muscle-up to banks (and deliver global peace)

So says a humiliated Wayne Byers, via Banking Day: A more frequent use of sanctions by APRA is on the cards, the regulator’s chair, Wayne Byres, told the banking royal commission yesterday. An afternoon of questioning of Byres was centred on themes of remuneration and bank culture and APRA practices in challenging boards over executive

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RBA warns on non-bank mortgage credit crunch

From Christopher Kent, Assistant Governor RBA (Financial Markets): Introduction Good afternoon, and thank you to the Australian Securitisation Forum for their invitation. It’s a pleasure to be here. Today I’ll provide an update on developments in the markets for housing and housing credit. These markets are closely related and both are of considerable interest to those

18

ANZ gives up on rate hikes

Via ANZ: We have revised our housing price forecasts. Sydney and Melbourne, in particular, have been downgraded. The fall in Sydney housing prices is already the largest in many years. Prices are now 9% below the June 2017 peak, a larger correction than in 2010-11, 2008, 2004-05, 1994-95 and, by the end of this month,

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RBA minutes howl rate hikes

RBA bulls in full charge: International Economic Conditions Members commenced their discussion of the global economy by noting that growth in Australia’s major trading partners had been robust in 2018. Growth was expected to ease a little over the subsequent two years, but to remain above potential in 2019. Although there had been little change

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McKibbin: RBA to blame for housing bubble and bust

At last MB and Professor Warwick McKibbin agree, from a nice piece by Adam Creighton: Guy Carson, chief investment officer at asset manager Quick Brown Fox in Sydney, warns that the bigger economic risk isn’t price falls but the volume of transactions. “The economic fallout from the stalling residential sector and falling house prices is

10

Friday Bloxo laugh

Haven’t seen the note. Don’t need to. Forexlive has the wrap: Labour market numbers for October showed that jobs growth remains robust and the labour market is tightening The unemployment rate held at the six-year low of 5.0%, with some states well below that level A tightening labour market should support a further lift in

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One reason to be very worried about Australia in the next global shock

We know all of the dry tinder. The big pile of external liabilities piled high in unproductive assets protected by the firebreak of public guarantees from a clean public sheet. But the next downturn could bring something that will set fire to all of this virtually overnight: Italexit. Via Albert Edwards, king bear: The orthodox

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RBA throws Guy Debelle under the Bernanke bus

From RBA deputy chair today: Assessing the Effects of Housing Lending Policy Measures Today I will summarise the Bank’s assessment of the various measures put in place to address the risks around housing lending. I will draw on Chapter 5 of the recent Financial Stability Review (FSR). I think it is important in terms of accountability that we