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.

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CS: Curve steepening at hand

From the excellent Damien Boey at Creit Suisse: We have just published a note explaining our positive view of the slope of the yield curve. This is a major change in view, after several years of curve flattening and inversion. Our thesis is as follows: Duration risk appetite is in overbought territory. From this starting

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How to do Australian “helicopter money”

Via BI: Citibank’s Australian economics and interest rate strategy team believe there’s a third option available to the RBA should the need arise: “helicopter money”, or printing money to be distributed to the public via the government. “Whilst on the experimental end we think it deserves serious consideration by the RBA,” said Paul Brennan, Josh

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Lunatic RBA and APRA mull new monetary insanity

From Chris Joye late yesterday: Industry participants believe the central bank and banking regulator are considering a targeted alternative to a cut to the official cash rate, which would involve lowering the minimum 7.25 per cent interest rate banks use when assessing a home loan borrower’s repayment capacity by 50 basis points to 6.75 per cent. All

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Inflation expectations plunge to multi-year low

By Leith van Onselen Following last week’s crashing headline and underlying inflation over the March quarter: Roy Morgan has released its Inflation Expectations Index, which has plunged to levels not seen since late 2016: In March, Australians expected inflation of only 4% per year over the next two years. This is unchanged on February but

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Does the lunatic RBA want Straya to be Greece or the US?

Via Alan Kohler on the weekend: As if reducing retirees’ incomes again is going to make any difference. Apart from anything else, the borrowers who theoretically benefit from a rate cut don’t reduce their repayments, so net incomes fall, not rise. Lopping another 1 per cent off interest rates might reignite the property market, and

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Bloxo versus everybody (updated)

Everybody is now forecasting imminent rate cuts: ANZ, NAB, WBC, MQG, CITI, CS, RBC, JPM, UBS, ME, TD, NOM, MB, bond and interest rate markets. Not Bloxo at HSBC or his mates at The Shadow: as the RBA has pointed out repeatedly, while the jobs market still has positive momentum, which is still the case,

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What next from the lunatic RBA?

The Deflation Bank of Australia faces a conundrum, via The Australian: The RBA is facing up to the reality that a review of its economic forecasts on May 10 will include cuts to both its GDP growth and inflation forecasts, sharply eroding any optimism it might retain about the economic outlook. Still, the impact on

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CPI in detail: Bullhawks crash!

By Leith van Onselen The Australian Bureau of Statistics (ABS) has released the Consumer Price Index (CPI) data for the March quarter 0f 2019, which registered plummeting headline and underlying inflation on weakening domestic demand. According to the ABS, headline CPI was flat (0% growth) in the March quarter, 0.5% below the December quarter’s 0.5%:

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Dovish RBA realises its ‘pushing on a string’

Dovish RBA minutes out just now: International Economic Conditions Members commenced their discussion by noting that the slower pace of global economic activity had continued in recent months. This had been particularly evident in the manufacturing sector. Survey measures of conditions in the manufacturing sector had declined across a range of economies, although they had

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RBA confirms Chris Joye’s big short

The new RBA Financial Stability Review is out and brimming with anxiety: Risks to the household sector have increased over the past six months given weak housing market conditions. Housing prices have fallen significantly in Sydney and Melbourne after the earlier large run-up in prices, while in Perth and other miningexposed regions, prices have been

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How corrupt regulators helped banks capture the Hayne RC

Via The Australian: O’Sullivan’s commission could do irreparable damage to the financial system. Everybody’s job, everybody’s mortgage, every loan to every business in the country was dependent on the strength and credibility of the financial system, they said, and O’Sullivan was about to lift the lid on a Pandora’s box. With the help of a

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IMF hits Aussie house price crash panic button

Via the AFR comes the IMF in an unusual break with the tradition of agreeing with whatever the locals say: Australia’s housing market contraction is worse than first thought, says a top IMF analyst, leaving the economy in what he called a “delicate situation” that boosts the need for faster infrastructure spending and even potential interest

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UBS: Weak fiscal triggers bigger rate cuts

Via UBS: Implications: smaller than expected stimulus raises risk of early/more RBA cuts Overall, as we flagged, the Budget improved modestly due to higher commodities & fiscal conservatism, with the surplus profile supporting the AAA. Household tax cuts & handouts were much smaller than expected; while infrastructure & public demand slow sharply. With credit tightening