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.


RBA holds

Barely even noticed! At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent. There has been a broad-based pick-up in the global economy since last year. Labour markets have tightened further in many countries and forecasts for global growth have been revised up. Above-trend growth is expected in


Australia’s future is deflation

Some weird old bullhawks return today: The dollar’s potential loss of its status as a high-yielding currency could cause the Aussie to plunge to US62¢, forcing the Reserve Bank to raise interest rates despite still-weak domestic growth, according to one of Asia’s most prominent currency strategists. The weak consumer economy makes it difficult for the RBA to raise


Return of the lonesome dove

From Capital Economics: When taken together with the RBA’s valid concerns that cutting interest rates further would threaten financial stability, today’s data suggest that underlying inflation is now at a level that the RBA will be willing to tolerate. As such, we are no longer expecting the RBA to cut interest rates further. That said,


Sputtering “bondcano” has another eruption

The infantile “bondcano” just won’t go away: After a brief hiatus, the reflation trade is about to enter stage two, and Aussie investors should stay long this theme, Credit Suisse’s Hasan Tevfik says. …”we forecast reflation to return,” says Mr Tevik, Australian equity strategist at Credit Suisse. “The global macro backdrop remains buoyant with solid


$100 separates Australia from a housing crash, apparently

Via Australian Broker: A staggering 57% of mortgage holders could not handle a $100 increase in their loan repayments, according to new research by This additional $100 is equivalent to an interest rate rise of just 0.45% based on the national average mortgage of $360,600. This means the average standard variable rate of 4.83%


Bloxo: RBA to hike on terms of trade lift

Another hopeful report today: For an inflation-targeting central bank, wages growth matters. Indeed, the two key empirical models that the RBA uses for forecasting inflation both have wages and the labour market as key inputs. The first is a ‘Phillips’ curve’ model, which suggests that as the unemployment rate falls, and spare capacity in the


RBA minutes turn dovish

From Bill Evans: The minutes of the Monetary Policy meeting of the Reserve Bank Board on April 4 contained some significant changes from the previous minutes for the March meeting. Of most importance has been the final sentence in the section Considerations for Monetary Policy – “the Board judged that developments in the labour and


If Citi is any guide, macroprudential 2.0 is going to misfire

Via the AFR on new lending changes from Citi: It is believed that other major lenders are planning similar announcements over coming weeks. …The major changes, which were notified to mortgage brokers last Thursday, will be a ban on interest-only loans for: All non resident loans; Loans reliant on foreign income; Loans requiring Foreign Investment


Does the RBA understand what it’s taken on in household debt?

From Bill Evans of Westpac today: Given the Reserve Bank’s intense concentration on stability issues, including the introduction of new guidelines from APRA, the April Stability Review is of particular interest. Our interest is twofold. Firstly to gauge the degree of concern with which the Bank views the current risks and secondly whether it has


Shame Oliver joins “don’t buy now” movement

Suddenly it’s a movement, via the AFR:  AMP Capital chief economist Shane Oliver has backed fellow economist Chris Richardson advice that young Australians consider renting rather buying a home in the current cycle. Speaking to the Australian Financial Review, Mr Oliver said Mr Richardson’s advice was “totally right” given that rental yields were at record


Childish “bondcano” gets punished

One of the more childish sell-side phrases that’s been bandied about for the past year is the so-called “bondcano”. I’ve pointed out many times the fallacy of the phrase and today it’s getting the treatment. US bond yields are getting thumped as the commodities boomlet deflates: I expect to see short-end yields rise further with the


JPM: Macroprudential 2.0 will hit house prices

Via AFR: “It is likely that overall mortgage lending will slow, as the acceleration in non-interest-only owner-occupier lending needed to offset the drags from macro-prudential tightening seems implausibly large…because lending, particularly in the investor category, has been key to driving housing market activity… The drag on genuine new housing transactions is clear, and could take some


Previewing CPI

From Deutsche: Our pick for Q1-17 headline CPI is for a 0.6%qoq/2.2%yoy outturn. We expect the average of the core measures to print at 0.4%qoq/1.8%yoy. We see headline CPI printing at 0.6%qoq in Q1-17 (due 26 April), and for the average of the core measures to print at 0.4%qoq. Despite an apparent rise in wholesale