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.
Via Martin North: We have released the June 2019 mortgage stress results, based on our running 52,000 household surveys. We found that 32% of households are now dealing with mortgage stress, a record, meaning they are having cash flow issues managing their finances and mortgage repayments. This translates into more than 1,063,000 households spread across
So says Morgan Stanley: We think the RBA will continue to express the view that fiscal policy will provide more effective easing from here, and look to that to provide the next tranche of stimulus (if needed). We are not forecasting any additional cuts from the RBA from here,although with the economy unlikely to pick
Via the excellent Damien Boey at Credit Suisse: We have updated our proprietary financial conditions index (FCI) for Australia in the wake of the RBA’s decision to cut rates (again). And our findings are reasonably positive for the economy and risk appetite. In our recent article, we outlined our methodology for constructing the FCI. It is
And I thought “Evil” Anna Bligh had disappeared. But no, via Banking Day: The banking industry is opposed to key parts of ASIC’s proposed overhaul of its guidance on responsible lending conduct, criticising it as a move away from principles-based regulation to a more prescriptive approach, and claiming it will disadvantage small financial institutions and
It’s wall-to-wall Lunatic RBA today. The Australian goes nuts: The Australian leads with house prices to jump 15% Adam Creighton, Lisa Allen and Mackenzie Scott agree Andrew White and James Glynn say more cuts are coming It’s a full court press with Brain White, Highrise Harry and Bloxo all quoited widely. Then there’s the AFR: Vesna Poljak
Via Chief Lunatic, Phil Lowe, last night: A very warm welcome to this community dinner with the Reserve Bank Board and senior staff. This morning the Board held its monthly meeting here in Darwin. We were very kindly hosted at the Northern Territory Parliament building. The last time the Board met in Darwin was more
Via Bill Evans at Westpac: As we expected, the Reserve Bank Board lowered the cash rate by 25bps to 1.00% at its July meeting. The motivation for this move is very much focussed on the labour market as was clearly indicated by the Governor’s recent speech. In the decision statement, he pointed out that employment
Via ANZ: Today we have decided we will reduce variable interest rates for our home loan customers by 0.25pc pa. Importantly, we will apply this reduction across all our variable rate home loans. It took the pain last time so now it someone else’s go. CBA’s! In response to the Reserve Bank’s move to cut
Tipping point anybody? Normally Australia’s big banks would soar on rate cuts as volume growth and curve steepening lifted their profits outlook. Not today: Smash. And why we know, from Goldman year’s ago: …if the cash rate was to fall below 1.50%, every additional rate cut thereafter would shave about 5 bp off sector margins.
The RBA is out with its July decision and it is chopity chop, chop: At its meeting today, the Board decided to lower the cash rate by 25 basis points to 1.00 per cent. This follows a similar reduction at the Board’s June meeting. This easing of monetary policy will support employment growth and provide greater confidence that
Via the AFR comes the ubermen: But The Australian Financial Review Rich Lister and shopping centre billionaire Con Makris and the chief executive of the largest collection of convenience shopping centres in Australia Anthony Mellowes both said cutting rates would not send the right signal. “It will panic the people,” Mr Makris said. There is some evidence
Might as well just put out the press release on automatic pilot: Australia’s inflation rate, at 1.3% (March quarter), remains well below the Reserve Bank of Australia’s official target range of 2-3%. The unemployment rate, at 5.2%, is unchanged from the previous month yields of benchmark 10-year government bonds have continued to tumble, making new
While the 1,400 fruitcakes at the Lunatic RBA and Corrupt APRA are busy deploying psychologists to bank boards to understand how to babysit psychopathy, the 300 focused souls at the RBNZ remain a beacon of sanity. Yesterday it released the latest in discussion process as it pushes towards huge lifts in bank capital reserves: The
Via Vimal Gor at Pendal: Everything (yes, everything) has a price, and in most cases higher prices drive down demand. But in rare cases when the thing in question satisfies a basic need and there are limited alternatives, higher prices can actually attract greater demand. Economists call these things Giffen goods, and government bonds are
Via the BIS overnight: The year in review It was perhaps too good to be true. In 2017, it was unusual to see a synchronised global expansion at rates above estimates of potential so late in the upswing and, moreover, to project it to continue well into the future. Some deceleration was on the cards.
Why would they? The so called “political pressure” to do so is gone. ScoMo and Recessionberg are banking and property patsies. As well, with each new interest rate cut below 1.5% net interest margins get squeezed. Formerly from Goldman: …if the cash rate was to fall below 1.50%, every additional rate cut thereafter would shave
From Mr Joye: The bottom line is that with more cuts coming, and APRA yet to reduce its 7 per cent serviceability test, the housing party is just getting started. …It is, as a result, plausible that the RBA gets less than two-thirds of the lending rate reductions it would normally expect from a brace of
Via the RBNZ today: The Official Cash Rate (OCR) remains at 1.5 percent. Given the weaker global economic outlook and the risk of ongoing subdued domestic growth, a lower OCR may be needed over time to continue to meet our objectives. Domestic growth has slowed over the past year. While construction activity strengthened in the
From Westpac this time: • As mentioned in our front page essay, last week’s RBA Board Minutes did nothing to silence the increasing market focus on the potential for the RBA to venture into more unconditional forms of monetary policy, such as quantitative easing. That is despite RBA Governor Lowe stating later in the week
It’s been like a warm blanket settling over markets for the past few weeks as the Lunatic RBA finally began to talk down the AUD. But it’s back to regular programming today as Phil Lowe ripped it off with a icy blast that questioned the usefulness of global easing: Lowe said the accomodative monetary policy would
We’ve already been through it. Ever since 2011 the RBA has tried to drop the Australian dollar with rate cuts, or has not lifted rates owing to the fear of a rising Australian dollar. This is what triggered the entrance of APRA into macroprudential policy in 2015. Since then a gulf of diffused responsibility has
Yesterday we saw regulatory capture out in the open at the AFR: Westpac has unleashed a fresh wave of property lending by relaxing serviceability conditions on low risk home loans, immediately increasing the borrowing capacity of aspiring home owners by as much as 8 per cent. A spokesman for Westpac confirmed the policy change saying credit officers
Via the AFR: Westpac has unleashed a fresh wave of property lending by relaxing serviceability conditions on low risk home loans, immediately increasing the borrowing capacity of aspiring home owners by as much as 8 per cent. A spokesman for Westpac confirmed the policy change saying credit officers would now have the discretion to approve principal
Via CBA: Lowe signals another cash rate cut is imminent Following Lowe’s speech today we are now expecting the RBA to cut the cash rate in July rather than August. We expect another 25 basis point cut later in year, probably November, taking the cash rate to 0.75%. Once again, the RBA have emphasised that