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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RBA minutes dove up

The RBA minutes: Domestic Economic Conditions Members commenced their discussion of the domestic economy by reviewing the latest inflation data. Headline and trimmed mean inflation had both been 1.8 per cent over the year to the September quarter, broadly in line with the Bank’s expectations. Retail price inflation had been low as competitive pressures in the

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APRA tightens lending standards again

Suck it up, Gottiboff. Bravo, just now. Housing – The importance of solid foundations WAYNE BYRES Chairman 21 November 2017 Keynote address at the Australian Securitisation Forum 2017, Sydney Good morning, and thank you to the ASF for the invitation to be part of this year’s conference. My APRA colleagues have made regular appearances at

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Goldman pushes back Aussie rate hikes

Well blow me down with a feather: The RBA lowering their inflation forecasts in the SoMP last week reduces urgency to hike … “buy the RBA some time” But .. “Against the backdrop of the fastest 8-month expansion in full-time employment on record, we caution against underestimating the pace at which spare capacity in the economy is

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RBA prays to the stone dead confidence fairy

From Deputy Governor Guy Debelle: One of the ongoing themes in the global economy since the financial crisis has been the long-lasting paucity of business investment spending. This has been despite conditions that, in the past, have been very favourable for investment spending, such as low borrowing rates, strong corporate balance sheets and solid profitability.

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Bill Evans: Rate hikes are off

Bill Evans from Westpac: In the August Statement on Monetary Policy, GDP growth was forecast at 2-3% in 2017, 2 ¾-3 ¾% in 2018, and 3-4% in 2019. These forecasts are largely unchanged for the November revisions. Growth is still forecast at 2 ½ per cent in 2017, 3 ¼% in 2018, and 3 ¼%

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Former RBA boffin explores lowflation

Via former RBA boffin Stephen Grenville: For the countries affected by the 2007-08 financial crisis, the recovery has been lacklustre. There was no self-equilibrating ‘V’-shaped return to the pre-crisis GDP growth trajectory (see the familiar graph below, or here). Nearly a decade on, the recovery may be more assured, but the performance of these economies raises

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RBA exposes Australia’s Minsky moment

From yesterday’s statement: Growth in housing debt has been outpacing the slow growth in household income for some time. To address the medium-term risks associated with high and rising household indebtedness, APRA has introduced a number of supervisory measures. Credit standards have been tightened in a way that has reduced the risk profile of borrowers.

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RBA holds again

RBA statement: At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent. Conditions in the global economy are continuing to improve. Labour markets have tightened and further above-trend growth is expected in a number of advanced economies, although uncertainties remain. Growth in the Chinese economy is being supported by increased

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Australia’s primary economic shock-absorber is broken

Via BofAML: Can the RBA ever raise rates? That’s the provocative question posed by Bank of America-Merrill Lynch’s Aussie rates strategists. Friday’s very disappointing retail sales figures reinforced the fact that consumers are, collectively, the Achilles’ heel of the economy. It’s sent economists into a bit of a tizz, although none, the BAML team included, expect the RBA to

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Shadow RBA gets hawkish

Place your rate cut bets. The shadow has turned hawkish: No Melbourne Cup Rate Rise But Future Increase Looking More Likely Consumer price inflation was 1.8% in the third quarter, below the consensus forecast of 2% and also below the Reserve Bank of Australia’s official target band 2-3%. This drop is likely to be transitory

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Bank levies don’t “cost jobs”, they create them

Gail Kelly says so: Former Westpac chief executive Gail Kelly has slammed the proposed South Australian bank tax, warning a short-term “sugar fix” sought by the Weatherill government will ultimately mean less ­investment and fewer jobs. In her first public remarks about the controversial impost, Ms Kelly yesterday told The Australian that a “quick fix, a sugar

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APRA corrals shadow banks

From Australian Parasite: The Australian Prudential Regulation Authority (APRA) will be tasked to infiltrate the non-bank sector for enhanced data gathering, according to Treasurer Scott Morrison APRA will have “eyes on the ground” with its ability to collect data from non-ADI lenders, Morrison said in an address to the Financial Services Council in Sydney yesterday (30 October). “Such

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Bank levy dividend: offshore funder abandons banks

Via The Australian: South Australia’s claims that its investment standing has not suffered as a result of the planned bank tax have been challenged after a significant international investor said it had slashed its ­exposure to Australia because of growing political risk. As the state’s upper house prepares to vote this week on the tax

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Australia’s future is DEFLATION

From the AFR: Weak wages, falling import prices and fierce retail competition have overwhelmed a spike in energy prices, putting downward pressure on inflation and cruelling prospects of any near-term Reserve Bank of Australia interest rate hike. Were it not for rising electricity and gas bills, as well as government-mandated “sin tax” hikes on alcohol and tobacco, inflation may

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Poor old Bloxo pushes back rate hikes, again

Some folks just won’t take yes for an answer: Today’s Q3 CPI print delivered a downside surprise, with underlying inflation still below the RBA’s 2-3% target band The key measures of underlying inflation showed it running at 1.85% y-o-y (the market had expected 2.0% y-o-y) We still expect a tightening labour market will mean that

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CPI in detail: Inflationary pressures well contained despite energy shock

By Leith van Onselen The Australian Bureau of Statistics (ABS) has released the Consumer Price Index (CPI) data for the September quarter 0f 2017 which, despite energy prices surging, registered both soft headline and underlying inflation. According to the ABS, headline CPI rose by 0.6% in the September quarter, well above the June quarter’s 0.2%

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Treasury confirms macroprudential preferred to control house prices

Via Treasury Secretary John Fraser in the Parliament today: Housing market and dwelling investment The housing market is another sector which we will be monitoring closely. In recent times, Australia has experienced one of the largest booms in housing construction since Federation, supported by record low interest rates and strong population growth. Since June 2014,

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Goldman: RBA to hike in Feb as wages surge

Via Bloomie: Woolies’ warehouse workers are preparing to walk off the job to demand higher wages and greater job security, in a sign that a strengthening labour market could be emboldening employees. …”This could be a canary in the coal mine,” said Andrew Boak, chief economist for Australia at Goldman Sachs. “When you sit back

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KPMG: Australia can weather six rate hikes no worries

Here’s some bullhawk droppings: Predictions by one of Australia’s largest property developers that a 150 basis point rise in the broad-based mortgage market would effectively trigger a recession have been challenged by KPMG modelling that says such a rise would only shave part of GDP. Frasers chief executive Rod Fehring said last week the sensitivity of interest rates would have