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.


Credit growth to stall out completely

Via Macquarie: We estimate that out-of-cycle interest rate hikes announced over the last 12 months reduced overall households’ incomes by ~$5bn. Furthermore a gradual shift from IO to P&I would take off additional $5-10bn from discretionary incomes or savings. However, given the distribution of debt, we estimate that ~60% of the reduction in discretionary incomes


The Fed to RBA: Hike rates and your bubble will bust

From the RBA Shadow today: Australia’s economic outlook remains mixed. The unemployment rate unexpectedly fell to 5.5%, while headline inflation remains well contained. On the other hand, household debt continues to break new records, raising concerns about a possible housing crash in the major capital cities. The RBA Shadow Board continues to advocate a hold-and-wait


Bloxo’s rate hikes resolve stiffens

From Bloxo today following his mentor Mr Rainbow: RBA tactics and commentary The improvement in the local labour market and business conditions as well as improving global economic conditions and a recent shift in rhetoric at other central banks will all act to re-affirm the RBA’s view that it will not need to cut the


APRA about to tighten again?

A speech from Wayne Byers yesterday certainly sets such up (cut to the end for the money quote): WAYNE BYRES Chairman The American Chamber of Commerce in Australia Business Briefing, Sydney 28 June 2017 Thank you for the invitation to speak this afternoon. I intend to talk today about international standards and national interests.1 The intersection


NAB joins specufestor interest-only smash

From NAB: NAB has today announced changes to its variable home loan interest rates, effective Friday 30 June 2017. The following three changes have been announced: The interest rate for owner occupiers making principal and interest repayments will decrease by 0.08% per annum, to 5.24% per annum The interest rate for owner occupiers making interest


Bank protection racket explodes

The conniption begins, from Chanticleer: Bad policy clearly breeds bad policy, as shown by South Australia’s $370 million tax on the big four banks and Macquarie Group. But South Australian Treasurer Tom Koutsantonis has created a problem for himself by aligning his “super profits” tax on the banks with the state’s share of the national


Wrong again, Bloxo

From Bloxo yesterday: …reading the economy recently has also required an expert eye. This is because many of the indicators we typically look at have been affected by the weather, or measurement issues, or both. Cyclone Debbie, which struck Queensland in late March, and unusually wet weather on the eastern seaboard, including the wettest March


AMP joins rate hike charge

From AMP: The pricing and policy changes for investment property loans, include: Variable interest rates for new and existing investment property loans will increase by 35 basis points For all new investor property loans, the maximum loan-to-value ratio (LVR) is reducing to 50%. This change applies to all new loans with an investment property as


Phil Lowe addresses post-truth with pack of lies

From Phil Lowe today 2017 Crawford Australian Leadership Forum: Global Realities, Domestic Choices: Responding to a Digitalising, Deglobalising, Post-truth world: The central issue is: where does the future growth in the global and Australian economy come from? There are four points that I would like to make. For a while, growth can come from a cyclical upswing


Professor McKibbin joins the bullhawks

At the AFR: The most dramatic three-month surge in job creation in 12 years is stoking speculation the long post-boom era of sluggish wages growth, which has helped support hiring at a time of falling national income, will eventually near its end. Former Reserve Bank board member Warwick McKibbin said the figures confirm that official


Mystery shopper reveals big mortgage tightening

Via Macquarie today: Rations are getting smaller In our view, housing lending credit standards are continuing to tighten as banks are responding to the macro prudential requirements and buffers imposed by the regulator. We believe these changes are likely to result in ongoing pressure on the outlook for banks’ volume growth. Furthermore, we see risks


Return of the bullhawk

From Bloxo: An influential survey – watched closely by the Reserve Bank of Australia – which showed businesses have just enjoyed the best month since the 2008 global financial crisis may be giving a more accurate reading of how the economy is doing than last week’s weather-blighted GDP report. While many economists have been downbeat