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.


Yawn: Pointless RBA shadow says hold

From the pointless RBA shadow: Australia’s major banks raised mortgage interest rates, citing an increase in global financing costs. Coupled with an unexpected rise in the domestic unemployment, low inflation, and a dearth of other economic news, the CAMA RBA Shadow Board remains convinced that the cash rate should remain at its current level. It


Could energy inflation drive rate hikes?

The absolute madness of the energy crisis is on display today as Morgan Stanley mulls inflation pass-through to food: Energy costs are escalating rapidly in Australia which we think will lead to cost pressure and potentially a return of food inflation. Consumers will also face higher energy costs, which could dampen sentiment, in our view. The


Louis Christopher slams “weak” APRA

From Louis Christopher at the AFR: “It’s weak. This is not going to be enough to slow down the Sydney and Melbourne housing boom. The boom continues if this is all it is,” Mr Christopher said. …”What we were thinking they may well have been doing was slowing down the overall investment lending credit growth limit to 5 per cent


Australian dollar hollowed out as yield spread keeps crashing

New narrows today for the carry trade into Aussie dollars as the yield spread on the two year bond hit 45bps overnight, it’s narrowest since April 2001: The last time the spread was this narrow, the Aussie dollar was trading at 49 cents. There are many variables at work but it gives you some notion


Australian financial conditions tighten

From UBS: Overview This week we update our Australian Financial Conditions Index, first published last year, and also launch a replica FCI for New Zealand. Our FCIs – an average of financial indicators (such as lending rates, the bond curve, the exchange rate and asset prices) – lead GDP growth by about 3 quarters in


CBA completes rate hike quartet

From CBA: Commonwealth Bank has today announced an increase in its Variable Home Loan interest rates and Viridian Line of Credit products effective Monday 8 May 2017: – The standard variable rate for owner-occupier home loan customers paying principal and interest will increase 3 basis points to 5.25 per cent per annum. – The standard


ANZ joins stampede to hike rates on specufestors

From ANZ: Principal and interest owner-occupier home lending Variable interest rates for the 80% of owner-occupier borrowers who repay principal and interest on their standard variable home loan remain unchanged at 5.25%pa. Investor home lending The variable interest rate paid by property investors will increase by 0.25%pa from 5.60%pa to 5.85%pa effective 31 March. Interest-only


Joye: The RBA must hike

From Chris Joye: The once market-orientated RBA now hopes that the bubble blown by its cheap money policies can be cauterised by getting the Australian Prudential Regulation Authority to re-regulate lending via “macroprudential” constraints on credit creation. Setting aside the fact that the RBA years ago warned that such controls may be ineffective when interest


The incy bincy BONDCANO!

Just a quick note in passing, as global and local bond yields plunge today, for those enamored of global reflation, passing secular stagnation and the BONCANO! In the US: And even more so in Australia: The so-called BONCANO is barely perceptible. Don’t get me wrong, I see US short end yields going to perhaps 2%


Australian dollar jumps as yield spread hits sixteen year low

Macroprudential discussion is going mainstream just in the nick of time. The Aussie dollar is again threatening to break above the 77 cents ceiling in the bullish ascending triangle pattern: This is despite Aussie yields falling today: As US yields rise: Which has the local slope steepening: As the US flattens: Thus the short end


Westpac hikes rates on all mortgages

Hello Westpac: The bank said it would lift rates on variable rate loans for owner-occupiers with principal and interest payments by 3 basis points and for owner-occupiers with interest-only loans by 8 bps. For property investors the variable loan rate for customers with principal and interest payments will rise by 23 basis points and for