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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800-pound RBA gorilla doubles QE pace

A fash note from Kieran Davies at Coolabah Capital: After defending its 3-year bond yield target last week, this morning the RBA doubled its QE purchases of Commonwealth bonds.  In the current QE programme, the RBA buys Commonwealth bonds twice a week and semi-government bonds once a week. The Commonwealth auctions are normally $2bn apiece,

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Liberty warns APRA property prices overheating

We noted this week that mortgage applications are now so hot that banks are unable to keep up and approval times are blowing out spectacularly. House prices are on the march too. FOMO is loosed and there is no prospect of higher interest rates for years. So freshly listed Liberty Financial is enjoying an unexpected

36

Taper tantrum 2.0 begins as markets catch hysteria virus

What a business cycle this is. Juiced by virus amphetamines it is moving extraordinarily fast. Last year we had the crash down, the crash up, a depression, thumping stimulus and K-shaped recovery, a gold boom and bust on debasement, growth stock bubble and now bust plus value rotation, an alleged commodity super-cycle, and now, one

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Why the RBA will NOT hike rates before 2024

Markets are today busily repricing the prospects for interest rate rises around the world. This is being driven by the vaccine-led post-COVID recovery, ongoing monetary and fiscal stimulus and rising supply-side inflation associated with bottlenecks and runaway demand for goods while services are suppressed by lack of mobility. Yesterday TD Securities argued that the RBA

5

RBA: Aussie bank offshore borrowing has collapsed

Fresh from the central bank: Christopher Kent, Assistant Governor (Financial Markets) Introduction Today I will discuss some recent developments in the foreign exchange market, and provide some views on the role of the Reserve Bank’s various policy measures. I will also briefly discuss a modest change to the way the Bank will be using foreign

7

Bonds head for vaccine bust

DXY was firm last night: Australian dollar fell: EMFX too: Gold and oil are doing the opposite, which is quite unsual: Miners to the moon: Base metals likewise: EM stocks whooshka: It’s a sunny day in junk land: Treasuries to the knackery: And stocks no like with the miracle of a down Monday: The Treasury

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Will K-shaped inflation crash markets?

As we know, the world enjoyed an unprecedented K-shaped recovery last year as goods boomed via stimulus and work from home. But high tough services completely busted amid social distancing. Now, it is becoming plain that inflation trends are following exactly the same pattern. Via some great charts from The Daily Shot on the US

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Dr Leigh smashes RBA QE timidity

For many years Australia has dragged the chin on unconventional monetary policy. Back in 2012, MB campaigned for zero interest rates, QE and macroprudential tightening. This would have shifted the recovery from house prices to tradables, a much more healthy pattern of growth. The RBA was useless for many years on this question, always looking

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Is QE blowing Australian bubbles?

Is QE blowing Australian bubbles? The question has dogged the FOMC for many years. Now, with Australian QE into its second iteration already, the panic is building. Is it justified? Chris Joye argues not: The Reserve Bank of Australia has launched an entirely necessary monetary policy regime that will involve sustained quantitative easing (QE) to

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Captain Lowe greenlights house prices to the moon!

Via the good Captain today in Parliament: The RBA does not – and should not – target housing prices. Instead our focus is on the lending that is used to purchase housing. There are many moving parts here at present: record low interest rates; a shift in preferences towards houses and regional locations; large government

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The most dovish RBA in history

The most dovish RBA ever by a country mile has tongues wagging. At Westpac: The Reserve Bank Board decided to extend the current bond purchase program by a further $100 billion. The purchases in the second tranche will begin in mid- April when the current program is set to be completed (that completion date could

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Lordy! Shadow RBA dovish

Here’s a measure of just how dovish Australia’s interest rate circumstances are right now. The perpetually hawkish Shadow RBA is also dovish: Signs of improvement but Shadow Board confident rates need to stay low Apart from some isolated hotspots, Australia’s policy of containing the coronavirus remains very successful, certainly by international comparison, and the economy