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.


Inflation expectations hit 7-year high

Roy Morgan has released inflations expectations for November, which has reached a seven year high: In November 2021 Australians expected inflation of 4.9% annually over the next two years, up 0.1% points, and the highest Inflation Expectations for seven years since November 2014. Inflation Expectations are now 0.2% points above the long-term average of 4.7%


CBA: Higher interest rates will drive property market correction

By Gareth Aird, head of Australian economics at CBA: Key Points: Australian dwelling price growth is forecast to moderate over the first half of 2022 on higher fixed mortgage rates, affordability constraints and natural fatigue after a period of extraordinary price gains. A further tightening in macro-prudential policy looks unlikely in our view given higher


New Fed chairman irrelevant

Deutsche with the note: The most important market event this week is likely to be on the future leadership of the Federal Reserve, as it’s been widely reported that President Biden is expected to announce his choice on who’ll be the next Fed Chair by Thanksgiving onThursday. Previous deadlines have slipped on this announcement, but


RBA throws wet blanket over rate hike hysteria

RBA Governor Phil Lowe yesterday gave an address to the Australian Business Economists (ABE) where he threw a wet blanket over market predictions that the cash rate will soon rise next year. Lowe first noted that inflation has undershot forecasts globally over the past decade, but is now on the rise; albeit appears temporary: The


Inflation or dumbflation?

Nordea with the note: Inflation or dumbflation? First, as the pandemic unfolds, you tell your population to hug Chinese people and call limiting international flights “xenophobic”. Soon thereafter, the media coverage of the virus scares the population so they stay indoors. And if they don’t, you lock them down. (In the US, Democrat voters believe it’s a 1-in-3


Mortgage shock coming despite RBA doves

Coolabah Capital with the note: Banks are gradually hiking borrowing costs for a range of reasons that are worth understanding. The first is that these interest rates were being artificially suppressed by the RBA’s suite of cheap money policies. Two particularly potent initiatives were the Term Funding Facility, under which the RBA lent banks $188


CBA: RBA’s economic forecasts and forward guidance unrealistic

By Gareth Aird, head of Australian economics at CBA: Key Points: The RBA stated in the November 2021 Statement on Monetary Policy that their updated central scenario for the Australian economy is consistent with the first increase in the cash rate being in 2024. But the RBA’s updated central scenario is conditioned on a path


Frydenberg panics as RBA smashes property prices into brick wall

Treasurer Josh Frydenberg panicked late Friday: The inflation genie is not out of the bottle, Treasurer Josh Frydenberg insists, as the Morrison government tries to calm investors and households spooked by the global inflation-led bond sell-off that stormed Australia’s shores this week. Mr Frydenberg said inflation had risen globally and was expected to persist longer


Joye: Four rate hikes will deliver a house price crash

Oh, the panic is on now! Chris Joye from Cooolabah with the note: Even 100 basis points of RBA cash rate increases would have profound consequences for asset pricing. Combined with some out-of-cycle rises from banks courtesy of normalising funding costs, this would probably force house prices, for example, to correct about 15 to 25


Housing bubble quivers as market rogers RBA

What a historic spanking. For a few months now Aussie inflation hawks have been testing the RBA’s commitment to yield curve control. Last week they forced it to buy more bonds. Yesterday, markets applied the blow torch to short-end bond yields, following Wednesday’s three-month-old inflation number, and the RBA folded like a crack whore needing


Gerard Minack: Rebooting immigration will crush wage growth

Economist Gerard Minack has written a note warning that rebooting Australia’s mass immigration program will crush wage growth and prevent the RBA from achieving its wage targets, which will keep inflation lower for longer: Stagnant incomes and below-target inflation [over the last decade] were due to low wage growth. Wage growth was low because there


UBS: RBA not going to hike rates

UBS with the note: Investors have challenged the RBA (again), as rate hikes are priced everywhere Market pricing for RBA hikes moved materially in recent weeks, propelled by the shift in global front-end rates. There are currently ~70bps of hikes priced by the end of 2022, and ~120bps by the end of 2024 (with UBS


Kouk panic: Rate hikes coming!

The Kouk windvane is back: For the first time in many years, central bankers and global investors are witnessing a material pick-up in inflation. Despite the evidence, which shows inflation lifting to levels well above target, the reaction of central bankers and investors has so far been muted. …Bond markets, which inevitably move well before central


Nordea: Higher inflation permanent!

A nice example of how crazy the inflation debate has gotten in the last few weeks comes from Nordea, a generally very sensible crew: The transitory vs. permanent inflation debate seems to be over as almost all consensus economists except for Christine Lagarde have started to warn against the current inflation pressure. The dark horse