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 minutes hit Goldilocks tone

RBA minutes: Domestic Economic Conditions Members commenced their discussion of the domestic economy by noting that labour market conditions had continued to improve, although spare capacity remains. Employment had risen further in July, the participation rate had edged higher and the unemployment rate had remained steady at 5.6 per cent. Full-time employment had risen strongly


Bloxo goes all-in on rate hikes

From Bloxo: Strong jobs growth: RBA hikes are coming Today’s jobs numbers delivered a strong upside surprise, with 54k jobs created in August (market had 20k) driven mostly by full-time job creation. These numbers line up well with the other surveys, such as the NAB business survey, job vacancies and job advertisements, which are also


RBA shoots down the bullhawks

Via Bloomie comes RBA board member Ian Harper with strong words of warning for the hawks: While it’s “terrific” full-time employment growth is strong and unemployment is slowly coming down, it’s a “concern” to see under-employment isn’t moving much and wages and household income growth are slow, because that indicates excess capacity, Harper said in


Why is Goldman expecting an RBA rate hike early 2018?

From Goldman: The RBA’s long-standing reference to labour market conditions “warranting careful monitoring” was an interesting omission from the final paragraph of August’s RBA Board Minutes. Since April 2017, the RBA had framed its neutral policy stance as a “watching brief” over risks in the labour and housing markets – with “uncertainty” on the labour


Bill Evans on the RBA

From Bill Evans at Westpac: As expected, the Reserve Bank Board decided to leave the cash rate unchanged at 1.50%. The Governor’s statement indicates that the Bank is feeling a little more comfortable with the outlook. Growth prospects have improved and the heat seems to be coming out of the housing market. Evidence to support


RBA holds OCR at 1.5%. Neutral bias remains

Here’s the statement by governor Phil Lowe: At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent. Conditions in the global economy are continuing to improve. Labour markets have tightened further and above-trend growth is expected in a number of advanced economies, although uncertainties remain. Growth in the


Monthly inflation dies

Via Melbourne Institute: MI headline inflation gauge, August: +0.1%mom, +2.6%yoy. Last, July: +0.1%mom, +2.7%yoy. MI trimmed mean inflation gauge, August: +0.1%mom, +2.5%yoy. Last, July: +0.1%mom, +2.3%yoy. Components: the largest contributors were private motoring (+1.0%mom), new dwellings (+0.4%) and recreation, sport & culture (+1.1%mom). These were partially offset by falls in holiday travel (-2.7%mom) and fruit


RBA shadow says hold

From the shadow: Economic Outlook Improves But Rates Should Stay on Hold Solid employment figures, growing business confidence, and a brightening of the global economy suggest a slightly improved outlook for the Australian economy. The RBA Shadow Board continues to advocate a hold-and-wait policy. It attaches a 61% probability that this is the appropriate setting.


Little lenders slam door on specufestors

Via the AFR: Heritage Bank, the nation’s second largest mutual, will stop offering property investment loans and is restructuring other products amid fears it will blow tough regulatory speed limits on lending growth after recent attractive offers attracted a deluge of borrowers. It follows the decision of CUA, the nation’s largest mutual, to stop writing new loans for property


The age of macroprudential dawns

Via Banking Day: Macro-prudential policy in New Zealand will be relied on for a while yet as it is “valuable in addressing financial stability risks”, Graeme Wheeler, governor of the Reserve Bank of New Zealand, said yesterday. In a long reflection on his five year term as a central bank chief, Wheeler positioned the less


Westpac tightens again as it struggles to get under interest-only cap

Macroprudential 2.0 is still in the swing as the nation’s largest zero-interest bank struggles get under the 30% cap, via AFR: Westpac Banking Group will today introduce a new range of policies intended to tighten lending by increasing scrutiny of borrowers’ income, the second policy change in a week after revealing its exposure to higher-risk


RBA drunk on the job

Via News: TAXPAYERS have been slugged a $166,000 booze bill over the last three years racked up by bankers at the Reserve Bank of Australia — the organisation in charge of the country’s fiscal responsibility. They quaffed two dozen bottles of 2012 Penfolds Bin 389 cabernet shiraz — valued at $75 each — and bought


Household credit stress rises

Via Credit Suisse comes confirmation of what we’re seeing RMBS for household credit stress: ■ Mortgage & card past-due ratios and mortgage impaireds ratios rose in the latest quarter, with loss rates stable in mortgages but rising in cards. Whilst acknowledging seasonality, a slowing Western Australian economy, and residual impacts of Cyclone Debbie, mortgage past-due


Interest-only switching going gangbusters

Via Morgan Stanley: While Australian banks’ margin recovery is in the sweet spot in late 2017, today’s new data from WBC shows IOL switching could be playing out earlier than the market expects. This presents downside risk to margins in 2018. Interest only switching is rising: WBC has more IOL(~50% of Australian mortgages) than other


Costello: Hike interest rates now

The Australian has the story to ruin household’s day: Peter Costello, chairman of the nation’s $130 billion Future Fund, has urged the Reserve Bank to lift interest rates now to avoid households’ taking on more debt, which he says is contributing to “massive imbalances” in the economy. The nation’s longest-serving treasurer also expressed concern that


Already time for more macroprudential?

Via Westpac: PulseAugust2017 ― Getting a precise fix on Australia’s housing markets remains tricky. Sentiment and lead indicators continue to point to a material slowdown and turnover is showing a renewed decline. However the picture around price growth is much less clear cut, with some moderation overall but trends varying greatly across capital cities –


RBA minutes perfectly neutral

From the happy idiots: Domestic Economic Conditions Members commenced their discussion of the domestic economy by noting that the June quarter inflation data had been in line with the Bank’s expectations and provided further confirmation that inflation had increased since 2016. Underlying inflation was ½ per cent in the June quarter and headline inflation was only


CBA cash profit nearly tops $10 billion

by Chris Becker Money laundering scandal? What money laundering scandal? The biggest division of Megabank, the former government owned division, just posted its eighth record high profit, slightly beating expectations. More from Bloomberg: Cash profit, which excludes one-time items, rose 4.6 percent to A$9.88 billion ($7.8 billion) in the 12 months ended June 30 from


RBA Statement on Monetary Policy – August 2017

By Gareth Aird, Senior Economist at CBA: Key Points: The RBA has shaved a little from their near-term growth forecasts while medium-term projections are broadly unchanged. Headline inflation forecasts have been nudged up while core inflation forecasts have been left unchanged. The RBA have a shallow downward trajectory for the unemployment rate that glides to