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.


More on Aussie QE

From Westpac this time: • As mentioned in our front page essay, last week’s RBA Board Minutes did nothing to silence the increasing market focus on the potential for the RBA to venture into more unconditional forms of monetary policy, such as quantitative easing. That is despite RBA Governor Lowe stating later in the week


Angry APRA wet lettuce slaps Westpac

Yesterday we saw regulatory capture out in the open at the AFR: Westpac has unleashed a fresh wave of property lending by relaxing serviceability conditions on low risk home loans, immediately increasing the borrowing capacity of aspiring home owners by as much as 8 per cent. A spokesman for Westpac confirmed the policy change saying credit officers


Westpac slices off a head of APRA wet lettuce

Via the AFR: Westpac has unleashed a fresh wave of property lending by relaxing serviceability conditions on low risk home loans, immediately increasing the borrowing capacity of aspiring home owners by as much as 8 per cent. A spokesman for Westpac confirmed the policy change saying credit officers would now have the discretion to approve principal


CBA: Second rate cut in July

Via CBA: Lowe signals another cash rate cut is imminent Following Lowe’s speech today we are now expecting the RBA to cut the cash rate in July rather than August. We expect another 25 basis point cut later in year, probably November, taking the cash rate to 0.75%. Once again, the RBA have emphasised that


Australian dollar hits new lows as RBA minutes lets doves fly

Via the Lunatic just now: International Economic Conditions Members commenced their discussion by noting that the data on the global economy released since the previous meeting had been mixed. GDP growth outcomes for the March quarter in some economies had been slightly stronger than the second half of 2018, while labour markets had remained tight.


Lunatic RBA: Surging mortgage arrears no risk

The Lunatic RBA cookie cutter spawns another relentless bull in Jonathan Kearns, Head of Financial Stability Department: Thank you to the Property Council for asking me to speak at this Property Leaders’ Summit. I want to address an important issue for the property industry – the rising rate of housing loan arrears (Graph 1). Why is it that


Joye: Banks and RBA at war

It should read banks and AFR at war with RBA, via Chris Joye: With only two or three rate cuts left in the Reserve Bank of Australia’s kitbag, and a best-case scenario involving banks passing on half these changes to borrowers, debate is intensifying around whether the central bank will embrace quantitative easing (QE) more


Bill Evans examines RBA QE

Via Bill Evans at Westpac: Over the last two weeks, I have been visiting institutional investors, real money managers, and hedge funds in Europe and London. There has been extraordinary interest in the Australian story on this visit. Westpac has received considerable credit for its views over the last eighteen months. A year ago, when


Ice Age returns to global bonds

There’s no downside to being a permabull when it comes to bonds. Albert Edwards from ScoGen is he: A key part of the Ice Age has been the prediction that US and European 10y government bond yields would fall to levels never previously seen – replicating Japan’s experience. We were told that this would never


Lunatic RBA turns uber-dovish

Via Luci Ellis last night: It’s great to be back at one of my alma maters to deliver the Freebairn Lecture in Public Policy. John Freebairn’s extensive publication record and long history of contributions to public debate speak to his abiding interest in public policy across a broad range of areas. It is indeed an


Lunatic RBA oversteps into fiscal again

No, it doesn’t. So why is it involved in this, via Domain: Reserve Bank governor Philip Lowe has urged key Senate crossbenchers to pass the Coalition’s $158 billion income tax cut package to get more disposable income flowing to stimulate a slowing economy. …In private briefings with the crossbench last week, Dr Lowe acknowledged the


Why the RBA should raise the inflation target to 5%

Monetary madness is sweeping the Australian elite. Let’s start with Professor Warwick McKibbin, at the AFR: There is evidence internationally that well designed infrastructure, with a rate of return that is considerably higher than the cost of funding, increases private sector productivity. …There also needs to be a change in the monetary policy framework. Today inflation


RBA foghorn: Cuts, cuts, cuts!

Via Terry Mccrann today: The economy is struggling, really struggling. It’s going to get help from the Reserve Bank with its official rate cuts, now definitely, plural. But it also needs help and needs help big-time from Canberra — and I stress the broader word Canberra not just simply and simplistically, the government. The government’s


Morgan Stanley: Consumer to hide stimulus under mattress

The nightmare is real, says MS, which lowered its Aussie growth outlook to 1.8% today: The other driver of household spending weakness was the savings rate increasing … In our view this reflects the pressures on household de-leveraging, in an environment of low wage growth, elevated debt and falling house prices. This may also limit the