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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EMERGENCY! Trigger the ADGSM now

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

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Weak-kneed RBA should have waited for wages, like it said

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

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Australia experiencing ‘profit-price inflation’, not wage inflation

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

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ANZ: Markets always wrong on Australian interest rates

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

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Australian wage growth badly misses expectations

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

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Where’s the inflation panic surrounding Stage 3 tax cuts?

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

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Australia’s housing market braces for record interest rate rise

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

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CBA: Next week’s ABS data crucial to RBA’s interest rate decision

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

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Has RBA bumbling triggered an Australian soverign debt crisis?

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

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Viktor Schvets: Rate cuts coming soon

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

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RBA triggers bond bloodbath, rates shock

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