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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Markets ready crippling mortgage jumps, house price falls

The latest Australian interest rate forecast from the futures market predicts the Reserve Bank of Australia (RBA) will hike the cash rate from its current record low level of 0.10% to 2.5% by year’s end and to around 3.4% by September 2023: If the market’s prediction comes to fruition, then Australians would experience the equivalent

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Aussie CPI inflation soars, smashes expectations

The ABS has just released CPI data for the March quarter, with headline inflation surging by 2.1% over the quarter and by 5.1% year-on-year: Soaring petrol prices (Transport) drove the rise: Trimmed mean annual inflation, which excludes large price rises and falls, increased to 3.7% – the highest since March 2009: Both headline inflation (2.1%

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Inflation expectations rocket ahead of CPI data

Aussie inflation expectations have rocketed ahead of tomorrow’s March quarter CPI release by the Australian Bureau of Statistics (ABS). According to Roy Morgan, inflation expectations over the next two years soared by 0.7% to 5.8% in March to its highest level in almost a decade (September 2012): The increase in March was the biggest monthly

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Buy bonds

So says BofA. Australian long-end bonds will be heavily influenced by US yields. — Inflation mania We view the current level of 10y rates as a compelling location to go long for a 3-month horizon. The10-year rates reached a pandemic-high of 2.92% on Tuesday. While this is close to the 3.28% peak of November 2018,

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More on the looming bond trade

Goldman has some good advice: Fed’s balance sheet unwind unlikely to support steeper curves. Minutes from the March FOMC revealed details about the Fed’s balance sheet reduction plan, which were largely in line with our expectations. The maximum cap is to be$95bn/month (split between $60bn for USTs and $35bn for MBS), roughly twice the pace

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Time to buy bonds?

So says Jeffries. My own view is that oil has likely peaked for the cycle already as China and India extract Russian oil and sanctions steer clear of energy. If you subscribe to it, my base case of the five shocks of European war and energy, Chinese property and OMICRON,  and US rates driving global

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Aussie house prices to crash 73% on 14 straight interest rate hikes

It’s a laugh a minute now for house price bears. Interest rate markets are now pricing nearly 14 straight interest rate hikes from the RBA by mid-2023: The recent bottom for the fixed interest-rate mortgage boom, which comprised 90%+ of new issuance, was around 2%. If markets are right, these will be rolling off at

1

What does Fed QT look like?

It looks ugly for risk assets as it shrinks demand to fit constrained supply. Goldman: — BOTTOM LINE: The March FOMC minutes revealed some of the key parameters of the balance sheet reduction process, including that the monthly cap would likely be set at $95bn—split $60bn-$35bn between Treasury and mortgage-backed securities—and that the caps would

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Bill Evans brings forward rate hike liftoff

Note from Westpac. — The Reserve Bank Governor surprised us on Tuesday with the Board’s decision to abandon its patient approach to monetary policy. Since the last Board meeting, when “patience” was emphasised, we have seen a further drop in the unemployment rate, from 4.2% to 4.0%, and a continuing surge in job vacancies pointing

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Soaring mortgage rates risk house price crash

The Reserve Bank of Australia (RBA) has updated its indicator lending rates for March, which shows mortgage rates across Australia rising: As shown in the above chart, the average discount variable mortgage rate finally rose by 0.15% from its pandemic low to 3.6% in March. The 3-year fixed mortgage rate also rose another 0.3% in