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.


Aussie inflation expectations rocket

ANZ-Roy Morgan’s latest consumer confidence report shows that sentiment remains in the gutter on increasing concerns around inflation. As shown in the next chart, consumer confidence is tracking at the lowest level since last winter’s Delta outbreak: Meanwhile, weekly inflation expectations rose 0.4ppt to 6.4% last week, its highest weekly reading since June 2012: As


Why hiking interest rates won’t tame inflation

The Conversation’s Peter Martin has published an interesting article explaining why the Reserve Bank of Australia (RBA) will be reluctant to lift interest rates, despite soaring inflation. Martin’s key contention is that Australia’s inflationary pressures have been imported via soaring oil prices from the Russian-Ukraine war and supply-side bottlenecks impacting inputs like semiconductors. Accordingly, lifting


Fed moves to 50pbs hikes

Goldman with the note. As they say, it’s not the first rate hike that stocks need to worry about, it is the second-last one. That just moved materially closer. — In a speech earlier today, Chair Powell said, “There is an obvious need to move expeditiously to return the stance of monetary policy to a


Aussie house prices mortally exposed to rising interest rates

Stuart Wemyss, an independent financial adviser, penned an article playing down concerns that rising interest rates could crash Australia’s property market. According to Wemyss, “financial theory, which proves there is a strong relationship between interest rates and asset values, cannot be used to explain property price movements”. Wemyss also claims there is a “weak historic


Afer a decade of going backwards, unions file for pay rises

Unions covering workers in sectors such as public hospitals, construction and hospitality are looking at wage claims of between 5% and 6%, with their members no longer happy with 3% pay rises. Their call comes amid suggestions that consumer price inflation will rise to 5% cent by June, although it is expected to ease in


Rising inflation expectations crashes consumer confidence

ANZ-Roy Morgan has recorded a strong rise in inflation expectations, which has jumped to 5.6% – its highest reading since November 2012 on the back of soaring petrol prices: This drove the consumer confidence index down 4.3% to its lowest level since October 2020: According to ANZ’s head of Australian economics, David Plank: Household inflation


Frydenberg flames interest rate hysteria

Federal Treasurer Josh Frydenberg has flamed the hysteria over interest rates, warning voters that markets are predicting 2%-plus of interest rate rises over the next two years: Treasurer Josh Frydenberg has warned Australians to brace for higher interest rates… In an exclusive interview with The Sunday Age and The Sun-Herald, the Treasurer put Australians on


Why have Aussie bonds dislocated?

BofA with the note. This is a good demostration of why markets are currently pricing in a very steep Aussie the bond curve forecasting a boom when pretty much everywhere else is bear flattening into a bust. I don’t buy it for a number of reasons: Liquidity is usually symptom not cause in risk-free assets.


Rising interest rates will crash Australian house prices

On Friday, MB’s David Llewellyn-Smith published the latest market forecasts on monetary tightening, which tipped the Reserve Bank of Australia (RBA) would lift the cash rate by around 2.15% by June 2023 (yellow line below): Such tightening, which is predicted to begin in May this year, would be the equivalent of nine interest rate hikes.


MB Special Report: Rising mortgage rates will hammer household finances

Earlier this week I showed how fixed rate mortgages have ratcheted up, rising by 0.48% (< 3 years) and 1.08% (>3 years) from their bottom last year: The story is different for variable mortgage rates. These have continued to trend lower, with the average rate available for new mortgages hitting an all-time low 2.52% in


RBA’s Phil Lowe flags late 2022 interest rate rises

RBA Governor Phil Lowe has just delivered a speech entitled “Recent Economic Developments”, where he pushed back against predictions of imminent rate rises, but noted that “it is plausible the cash rate will be increased later this year”. Below are extracts of the speech, with key points highlighted in bold: The journey towards full employment