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.
BofA with a quick insight into why the Fed is not worried about stock prices right now. — As the equity market continues to sell off, investors are asking: what does this mean for the economy and how bad does it need to be for the Fed to pause? On these questions, a picture is
Here’s what the Australian Industry Group said yesterday: “The cessation of gas trading by Weston Energy plunges hundreds of businesses across Eastern Australia into uncertainty around their energy bills and is a warning of more pressures to come on business and households from high energy prices,” Innes Willox, Chief Executive of national employer association Ai
Goldman with an interesting, Basically, US rate shocks are Chinese growth shocks. — Our global financial conditions index (FCI) has tightened, in part because the Fedhas turned more hawkish in the face of rising inflation but slowing growth. Where are risks to growth from FCI spillovers largest? We estimate rules of thumb for the impact
Here’s what the Lunatic RBA said in Minutes this week: Turning to domestic economic conditions, members observed that price pressures were intensifying and there was upward pressure on wages. Activity and conditions in the labour market had been resilient in the face of global and domestic supply shocks, and strong underlying momentum was expected to
While the business lobby, its captured media, and the Coalition are all scaremongering about a ‘wage-price spiral’ if the minimum wage lifts in line with the Consumer Price Index (CPI), Jim Stanford from the Centre for Future Work has instead argued that “profit-price inflation” is the far bigger concern: De-unionisation, insecure work, and deregulation of
The latest Australian interest rate forecast from the futures market tips the Reserve Bank of Australia to lift the official cash rate (OCR) to 2.7% by the end of this year, peaking at 3.4% by mid-2023: If the market’s projection proved correct, this would be the equivalent of another nine 0.25% interest rate hikes over
Westpac with the note. What’s “prudent” about tightening into tradable inflation, stagnant wages, and a global bust, Bill? — Recently Westpac revised down its growth forecast for 2022 from 5.5% to 4.5%. That reflected the sharp increase in the cost of living as headline inflation lifted by 5.1% in the year to March 2022, including
Australian wage growth missed economists’ expectations in the March quarter of 2022, according to new data released today by the Australian Bureau of Statistics (ABS). Total wages grew by only 0.65% in the March quarter, missing analyst’s expectations of 0.8% growth. Private sector wages grew by 0.65% over the quarter, whereas public sector wages grew
Over the past few weeks, we’ve witnessed the business lobby, mainstream media, the IPA and Coalition all hit out at the union’s and Labor’s call to lift the minimum wage by the Consumer Price Index (CPI), claiming that doing so would stoke inflation and force up interest rates. At the same time, these groups have
Roy Morgan has released its inflation expectations survey for April, which shows that expectations fell 0.5% to 5.5% after fuel excise was cut by 22.5 cents in the March federal budget: In April 2022 Australians expected inflation of 5.5% annually over the next two years, down 0.3% points from March 2022. The level of Inflation
Labor leader Anthony Albanese continues to attract scrutiny over his push for the minimum wage to be increased in line with the inflation rate. The Institute of Public Affairs (IPA) estimates that a 5.1% increase in the minimum wage would add about 2.25% to the inflation rate over the next 12 months. It would, therefore,
If you want to understand just how biased the Australian MSM is these days then look no further than the last week of political coverage. All of last week we heard uncritically of how inflationary would be a simple pay rise matching inflation for low income workers. That is, not even a real pay rise, just
Freelance journalist Tarric Brooker has authored an interesting article estimating how forecast interest rate rate rises would compare with Australia’s historical experience. Rather than examining raw interest rate increases, Brooker has instead calculated the percentage change in mortgage interest repayments from the trough to the peak of the interest rate cycle. The analysis shows that
Deutsche with some alternative methods for measuring US financial conditions. I completely agree that the market has the extent of rate hikes wrong. But I still see a few more before it all goes to shit. Almost by definition the Fed has to over-tighten before it stops. — A Volcker-like rise in the shadow rate
By Gareth Aird, head of Australian economics at CBA: Key Points: Next week the ABS will publish the Q1 22 Wage Price Index (WPI) and the April labour force survey. These two data releases are the most important economic information ahead of the June Board meeting. We expect the WPI to increase by 0.8%/qtr in
ZH reporting on a chat with Fed chair Jay Powell this morning. In my view, the Fed has to break oil before it can pivot. — Speaking on MarketPlace Radio this evening, Powell said the central bank has both the tools and resolve to bring down rapid inflation — though he acknowledged that the path to
The biased corporate press has a new panic to attempt to sway a losing election hand: Businesses are reporting a surge in the cost of workers just as Labor leader Anthony Albanese backs a 5 per cent wage increase to match the high inflation rate. National Australia Bank’s monthly business survey shows business conditions are
A month or so ago, the RBA said it was going to be patient about inflation and wait to see wages growth before it hiked. It was no longer going to anticipate wage growth, it wanted to see it first to ensure it was sustainable. Most of Australia’s inflation is still tradable (coming from offshore)
The futures market has truly lost its marbles, ratchetting up its Australian interest expectations even higher. As shown below, the RBA cash rate is now forecast by the market to hit 2.75% by the end of this year and around 3.7% by September 2023: The next table shows what the market’s forecasts would mean for
Gareth Aird, head of Australian economics at CBA, has hosed predictions that interest rates could climb to 2.5% or above, for the simple reason that Australian households are far too indebted to endure such rate rises without causing a hard landing for the economy: Money markets have priced a more aggressive tightening cycle than I
Chris Joye at Coolabah has an excellent house price forecasting record and he is BEARISH: The RBA has a long history of getting the Aussie housing market’s reactions to its cash rate changes horribly wrong, which is surprising given how easy the housing cycle is to forecast. Crucially for investors, this interest rate cycle will
The relentless rise in Australian yields, to levels far beyond anything that the economy will be able to take, is now posing an interesting question. Futures are now pricing a terminal interest rate of 3.7% next year. This would obviously destroy Australian house prices and the economy both: Sovereign yields are quickly playing catch-up in
In Tuesday’s media conference following its decision to lift the cash rate by 0.25%, Reserve Bank governor Phil Lowe said it was “not unreasonable” to expect the cash rate to climb to 2.5%: “How quickly we get there, and if we do get there, will be determined by how events unfold,” [Lowe] added, pointing out
Macquarie’s Viktor Schvets is ahead of the pack as usual: “My view for some time was that as we go through 2023 and 2024, there is a much higher probability of loosening of both fiscal and monetary policies than tightening,” he told the Macquarie Australia Conference on Wednesday. “What is going to happen is when
Well done to the RBA. Having promised rock bottom rates to 2024, it has now unleashed the greatest single greatest interest rate shock in modern history: There is nothing in the Australian economic outlook to support these rates. It is some combination of failed RBA credibility, Wall Street commodities narrative, and temporary post-COVID bounce. The
