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.


Bill Evans tours Trumpland

A nice note here from Bill Evans at Westpac: For the last two weeks, I have been in the US visiting investors; hedge funds; corporates and officials. I still have more meetings to complete, including with other Fed officials, but I would like to set out some assessments so far. It will come as little


The very disappointing Phil Lowe

I was once a fan of Mr Lowe. He had a little chutzpah when he took on the Greenspan doctrine at the turn of the millennium. But, like so many in Australian public life, the institutional mincer grinds that out of you before you reach the top, via the AFR: Paul Dales from Capital Economics


Is the interest only mortgage dying?

From Domainfax: Macquarie Bank property borrowers will have to disclose their spending on everything from footy to fashion under tough new credit rules about to be introduced. Borrowers seeking a loan will be asked for details on their spending in 12 separate categories covering household and discretionary spending to asses eligibility for a loan. The


IMF tells Bubble-o-Phil to slash rates

Via David Uren: The IMF has urged the Reserve Bank to slash rates in a much more pessimistic analysis of the outlook than presented in the bank’s latest forecast, arguing the economy is at risk of getting caught in a Japanese-style low inflation and low growth trap. The fund presents extraordinary modelling showing the ­Reserve


BankWest (CBA next) kills negative gearing for loans

Oh dear! Via the AFR: Bankwest is set to rock the $1 trillion mortgage market and more than 1.5 million property investors by axing negative gearing benefits that drive lucrative residential property investment, particularly in Melbourne and Sydney. The bank – owned by Commonwealth Bank of Australia, the nation’s largest mortgage provider – will announce on Monday that generous


RBA sees futureboom!

From Bubble-o-Phil today: To this: This year’s growth has been shredded but worry not, the RBA always has a future boom at hand and despite a poor H1 this year, H2 is going to rocket to deliver an unchanged result of 3%. How? Overall, the forecasts for year-ended GDP growth are lower over the next


What is Phil Lowe smoking?

From RBA head, Backbone Phil, today: I would like to offer you all a very warm welcome to Sydney for the A50 Forum. To those of you who have travelled to our shores from afar, thank you for visiting. I am confident that you will find your investment in time a worthwhile one. In just


Bloxo turns to rate hikes

From Bloxo: The tailwind is here. Higher commodity prices are boosting national incomes and the numbers are large. Export values rose by a strong 32% y-o-y in December which drove the largest trade surplus on record. This is driving a strong rise in mining profits and tax revenues. The debate is about whether the lift


Another RBA governor held hostage by specufestors

“Backbone” Phil as I call him yesterday delivered the most forceful hold in interest rates that I can recall in weak circumstances: Conditions in the global economy have improved over recent months. Business and consumer confidence have both picked up. Above-trend growth is expected in a number of advanced economies, although uncertainties remain. In China,


Bill Evans turns dovish

From Westpac’s Bill Evans: As expected the Reserve Bank Board decided to hold the overnight cash rate unchanged at 1.5%. The commentary in the Governor’s statement was a little more upbeat than had been the case in December. In particular the global view has been lifted from global growth “lower than average” to “growth above


RBA holds assertively

No hint of easing here: At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent. Conditions in the global economy have improved over recent months. Business and consumer confidence have both picked up. Above-trend growth is expected in a number of advanced economies, although uncertainties remain. In China,


Eslake, Oliver tell APRA to tighten

From Domainfax: Independent economist Saul Eslake says that if you see the rebound in investor lending as a concern, there are three options on the table. One would be to raise official interest rates – but don’t count on that. When inflation is still well below the RBA’s target, the market is firmly in agreement that a rate rise is a long way off.


Australia’s neutral cash rate sits at a record low

Cross-posted from Gareth Aird, senior economist at the Commonwealth Bank. Key Points Changes in productivity, the stock of debt, lending margins, fiscal policy and the exchange rate impact the neutral cash rate. We estimate the neutral policy cash rate has moved to a record low of just 3% (2½ – 3½% range) which is lower than our


Goldman doubles down on Aussie rate hikes

From the AFR comes the always excellent Tim Toohey: The probability the Reserve Bank of Australia raises interest rates in November this year is “somewhere in the 40s and rising” according to Goldman Sachs, which forecasts New Zealand rates to rise at the same time. …”You’ve got to wonder why people are still looking for


Interest rates goin’ to 1%

Says Capital Economics: If Paul Dales is right the Reserve Bank will cut the official cash rate to 1 per cent later this year. The chief economist from Capital Economics, who’s called the current interest rate cycle better than most, “suspects” the RBA will be forced to cut from the current level of 1.5 per


Aussie bond yields break out

It ain’t just China! Aussie bond yields are hitting new highs today as well as the back-up marches hand in hand with falling commodity prices. A full rate hike priced now: The curve is flattening again though: But we’re now outstripping US bonds: Frankly, the US steepening still looks very unconvincing: But the yield spread


Deutsche: Brace for inflation spike

Via Deutsche: Our early pick for Q4 CPI is for a strong headline print of 1.0%qoq, leaving headline CPI at 1.9%yoy. We expect core CPI to remain soft however, at 0.4%qoq to be up 1.5% in year-ended terms. (We will refine our estimate once the full suite of price indicators becomes available in mid-January.) The