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.
Via Bloomie: New Zealand’s government has proposed adding house prices to the central bank’s remit to rein in an overheating property market, prompting investors to reduce bets on lower interest rates. The local dollar jumped. Finance Minister Grant Robertson said Tuesday he has written to Reserve Bank Governor Adrian Orr, asking him to consider amending
Via RBA deputy Guy Debelle: Monetary Policy in 2020 I spoke at the ABE annual event 2 years ago in December 2018. In that speech, I talked about the lessons and questions from the global financial crisis that had occurred 10 years earlier. Today, the global economy has experienced another crisis, but one which has taken a very
Professor Wazza McKibbin at the AFR today: Former Reserve Bank board member Warwick McKibbin says the central bank’s $100 billion quantitative easing program will not stimulate the economy, but will help stave off a financial crisis if the global outlook takes a turn for the worst. The Australian National University professor said the central bank’s
Via the ABS: The Consumer Price Index (CPI) measures price change for goods and services purchased by Australian households in the eight capital cities. It is a measure of inflation that informs monetary and fiscal policy. It is also used widely by economists and the general community to assess the health of the Australian economy.
Minutes just now: International Economic Developments In their discussion of international economic developments since the previous meeting, members noted that the global economy was in the early stages of recovery following the largest contraction in decades. GDP outcomes in major economies in the September quarter had generally been somewhat better than expected after very large
Via Banking Day: A leading non-bank mortgage lender has warned that non-banks originating prime mortgages face tough market conditions, largely as a result of the pricing impact of the Reserve Bank’s term funding facility. Firstmac chief financial officer James Austin said non-banks have had the benefit of the Australian Office of Financial Management’s Structured Finance
Via Nikko: For the past six months, the RBA has been subdued at using unconventional policy compared to offshore. After six months of sitting on the sidelines, the RBA has finally eased rates. Chris Rands, Portfolio Manager, Fixed Income at Nikko Asset Management has penned a piece exploring the RBA’s delay to move and ease
Via Ross Gittins today: But I’ve heard from a lot of retired central bankers who disapprove of the Reserve’s scraping of the barrel. And last week Dr Mike Keating, a former top econocrat, also questioned the wisdom of keeping on keeping on. Some other people have seen the Reserve’s decision to, in Lowe’s words, “do
Thanks to Ian Verrender at the ABC: Donald Trump has been right all along. The system really has been rigged. For as the US electoral pantomime played out last week, beamed into a billion lounge rooms across the globe, the real power play moved on in earnest behind closed doors. While votes were tallied in
Via UBS: AUD & NZD: Upside risks to front-end NZD rates; RBA QE + CLF = lower AU 10y The RBNZ hasn’t been providing a forecast path for the OCR for the quarters after March-21; but we expect this to change at the 11 November MPS (see here for our preview). If the RBNZ refrains
Via the RBA’s SoMP: Wages growth declined in the June quarter Growth in the Wage Price Index (WPI) slowed to 0.2 per cent in the June quarter, to be 1.8 per cent higher in year-ended terms (Graph 5.14). These quarterly and year-ended growth rates were the slowest in the history of the series. Private sector wages growth slowed to 0.1 per cent
Via Bill Evans at Westpac: As expected the Reserve Bank Board decided to cut the cash rate target from 0.25% to 0.1%; cut the target yield on the 3 year bond from 0.25% to “around” 0.1%; cut the rate on new drawings under the Term Funding Facility from 0.25% to 0.1%; and cut the rate
It’s not quite wall-to-wall RBA drivel but it’s close. The AFR is a monetary swamp, as usual. First up is a waffling Richard Holden: The Reserve Bank of Australia did exactly as it signalled and markets expected by cutting the cash rate to 0.1 per cent and expanding its bond-buying program on Tuesday. Now that
From Captain Phil at the RBA: Good afternoon. The Reserve Bank Board met this morning. It decided on a package of further measures to support the Australian economy as it recovers from COVID-19. Given the significance of this package, I wanted to explain in person what we are doing and why we are doing it and
From the RBA just now: At its meeting today, the Board decided on a package of further measures to support job creation and the recovery of the Australian economy from the pandemic. With Australia facing a period of high unemployment, the Reserve Bank is committed to doing what it can to support the creation of
Via Morgan Stanley: …investors were a bit too complacent on the uncertainty surrounding the election outcome, unlikely passage of a fiscal stimulus before the election and second wave of Covid-19…the short answer is that the worst of the correction is over in our view but we still think the next month is likely to remain
Some relatively sensible whinging about QE from the boffins today. First, Adam Creighton: Prosperity is never the gift of either fiscal or monetary policy and its supposedly wise practitioners. It’s a consequence of technological progress and more efficient allocation of resources. On the former, we’re hostage to fortune. On the latter, we need much more:
Via Bill Evans at Westpac: The Reserve Bank Board meets next week on November 3. The Bank will also release its November Statement on Monetary Policy on November 6 where it will provide detailed colour around the policy decisions and print its revised growth forecasts. The Bank has not updated its forecasts since August 7.
Via The Shadow: With Victoria successfully containing the corona virus and lifting stage 4 restrictions, Australia’s overall Covid-19 statistics (infection numbers and death rates) look comparatively benign. The inflation rate, based on the latest ABS CPI estimate, has returned to positive territory, equalling 0.7% year-on-year in the September quarter (after equalling -0.3% year-on-year in the
The AFR has finally discovered a somewhat more balanced debate about imminent RBA quantitative easing but it has more work to do. On the weekend, the usual suspects had a good whinge: “Further rate cuts would be counter productive to the economy,” Professor McKibbin said, “Why keep cutting rates when we know it does nothing
Via the AFR: ANZ CEO Shayne Elliott has warned the Reserve Bank that its expected interest rate cuts will further drown the financial system in liquidity, hitting bank profits by squeezing margins but doing next to nothing to stimulate the economy and jobs. Mr Elliott said he wasn’t sure what problem further easing would solve
Via The Australian: The Reserve Bank of Australia has scope to ease monetary policy settings further if it wants, and any suggestion that its firepower has run out can be dismissed, Ian Harper, a member of the central bank’s policy-setting board, told the Wall Street Journal. “There is certainly capacity for the Reserve Bank to
From Gareth Aird, Head of Australian Economics at CBA: Key Points: We expect the RBA to ease monetary policy at the November Board meeting and we expect a suite of measures to be announced. We expect the RBA will lower the cash rate target, lower the target on the 3-yearAustralian Government bond yield and lower
From CBA’s head of Australian economics, Gareth Aird: We expect the headline CPI to increase by 1.4% in Q320 (+0.5%/yr). The trimmed mean CPI on our forecasts will print at +0.4% (+1.2%/yr). Recent communication from the RBA means that more policy easing is imminent and we expect it to be delivered at the November Board
Via FTAlphaville: MMT is a theory that people love to love, and love to hate. The idea, which stands for Modern Monetary Theory, is frequently cited by academics and politicians on the left as evidence that the state has further capacity to spend without serious consequences to the economy (yet!). On the right, meanwhile, it’s
Via Bill Evans at Westpac: Our views on the likely decision by the RBA on November 3 have been clear since our note on September 23. “All the key policy rates – cash rate; three year target bond rate; and rate on Term Funding Facility will be cut from 25 basis points to 10 basis
In his recent Lowy Institute commentary, RBA alumnus John Edwards demanded MOAR: Just as the Australian government has little choice but to continue for some time with the expansionary fiscal stance it adopted in response to the pandemic, so too the RBA has little choice but to continue its expansionary monetary stance. In the RBA’s
From Roy Morgan Research: In September Australians expected inflation of 3.3% annually over the next two years, up 0.1% points on the record low in August. However, Inflation Expectations are still down a significant 0.7% points on the pre-pandemic month of March 2020… Inflation Expectations have fallen significantly for all Australians during the pandemic, down
More monetary drivel from the AFR yesterday: Considerations on the strength of the Australian dollar and the significant drag on the economy because of Victoria’s lockdown were two key factors that influenced decisions on further monetary easing bias, the minutes reveal. In the September minutes the RBA said: Members recognised that the substantial, coordinated and
Via Bill Evans at Westpac: The Minutes of the October Board meeting of the Reserve Bank of Australia confirm the key themes of Governor Lowe’s speech which was delivered on October 15. They indicate that the Board had effectively decided to ease policy at the October meeting. One reason for delaying the announcement would have
