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.


Australia’s jobs boom ends, extinguishing RBA rate hikes

The Australian Bureau of Statistics (ABS) has released labour market data for July, which showed that Australia lost 40,900 jobs (-0.3%) over the month, with hours worked also falling by 16 million (-0.8%): However, because the labour force participation rate fell by 0.3% to 66.4%, the nation’s unemployment rate actually fell by 0.1% to 3.4%


Soft Aussie wage growth tempers RBA rate hikes

Australian wage growth missed economists’ expectations in the June quarter of 2022, according to new data released today by the Australian Bureau of Statistics (ABS). Total wages grew by only 0.72% in the June quarter, missing analyst’s expectations of 0.8% growth. Private sector wages grew by 0.72% over the quarter, whereas public sector wages grew


Four variables that will determine Australia’s house price crash

Australia’s auction results rallied for the third consecutive week, with the preliminary clearance rate lifting above 60% for the first time since early June after 61.5% of auctions returned a successful result (up 2.0% from last week): The rebound nationally was driven by Melbourne, whose preliminary clearance rate rebounded to 65.5%. This was the highest


Soaring interest rates trap Aussies in ‘mortgage prison’

Australians that leveraged up to purchase property at the peak of the market risk being trapped in ‘mortgage prison’, according to mortgage experts. They warn that the combination of rising mortgage rates and falling house prices (negative equity) will impede their ability to refinance because they will no longer meet borrower stress tests, potentially trapping


Housing bottlenecks drive massive inflationary shock

Deloitte’s weekly economics briefing notes that the housing market is becoming a key driver of Australia’s inflationary pressures: Housing was one of the key contributors to the latest CPI reading (alongside transport and household goods), growing 9.0% through the year to June. A key driver behind the growth was the jump in new dwelling prices,


Aussie inflation expectations hit 8-year high

Roy Morgan has released it July inflation expectations survey, with inflation expectations hitting their highest level since August 2012. Inflation Expectations in July are a large 1.8% points higher than a year ago in July 2021, and 2.5% points above the near record low of 3.4% in July 2020. Inflation expectations have risen across the


Lunatic RBA crashes Aussie consumer confidence

ANZ-Roy Morgan’s weekly consumer confidence index has crashed by 4.5% to its lowest level since April 2020. This follows the Reserve Bank of Australia’s (RBA) third consecutive 0.5% rate hike last Tuesday: Key points from the release are as follows: Consumer confidence sank 4.5% last week, more than offsetting the gains over the previous three


CBA: Markets too hawkish on Australian interest rates

CBA’s head of Australian economics, Gareth Aird, has released a note explaining why he believes that the market’s projected official cash rate (OCR) for Australia – currently tipped to peak at 3.35% in March 2023 – remains too bullish. Instead, Aird tips that the OCR will peak at 2.6% – a level that he considers


Housing market “settling” as vendors accept lower prices

CoreLogic’s preliminary auction results for the weekend report a slight rebound in clearances; albeit off relatively thin volumes. Across the combined capital cities, the clearance rate was 59.5% – up from 58.8% the previous weekend (later revised to 54.0% at final figures). Importantly, both Sydney and Melbourne reported preliminary clearance rates above 60% – both


RBA crashes Sydney house prices

CoreLogic’s daily dwelling values index, which measures price changes across Australia’s five major capital cities, fell another 0.22% in the week ended 5 August – the 13th consecutive weekly decline: Once again, the fall in dwelling values was driven by Sydney (-0.29%), Melbourne (-0.34%) and Brisbane (-0.14%), whereas Adelaide (+0.12%) and Perth (+0.07%) recorded rises:


Lunatic RBA wrong again on Aussie wages

In June, economists lashed the Reserve Bank of Australia (RBA) for relying on business liaison, rather than actual data, to claim that Australian wage growth was strong. It then used this liaison “evidence” to justify aggressive interest rate hikes. The RBA’s reliance on liaison represented a sharp U-turn, given it previously said that it would


Why rising interest rates means falling house prices

The ABC published an article neatly explaining why rising interest rates necessarily means that house prices will fall. To cut a long story short, a higher interest rate lifts monthly mortgage repayments, which in turn limits the amount that a prospective home buyer can borrow. The ABC cites the real world experience of the Chamberlain