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.


Australian dollar hits new lows as RBA minutes lets doves fly

Via the Lunatic just now: International Economic Conditions Members commenced their discussion by noting that the data on the global economy released since the previous meeting had been mixed. GDP growth outcomes for the March quarter in some economies had been slightly stronger than the second half of 2018, while labour markets had remained tight.


Lunatic RBA: Surging mortgage arrears no risk

The Lunatic RBA cookie cutter spawns another relentless bull in Jonathan Kearns, Head of Financial Stability Department: Thank you to the Property Council for asking me to speak at this Property Leaders’ Summit. I want to address an important issue for the property industry – the rising rate of housing loan arrears (Graph 1). Why is it that


Joye: Banks and RBA at war

It should read banks and AFR at war with RBA, via Chris Joye: With only two or three rate cuts left in the Reserve Bank of Australia’s kitbag, and a best-case scenario involving banks passing on half these changes to borrowers, debate is intensifying around whether the central bank will embrace quantitative easing (QE) more


Bill Evans examines RBA QE

Via Bill Evans at Westpac: Over the last two weeks, I have been visiting institutional investors, real money managers, and hedge funds in Europe and London. There has been extraordinary interest in the Australian story on this visit. Westpac has received considerable credit for its views over the last eighteen months. A year ago, when


Ice Age returns to global bonds

There’s no downside to being a permabull when it comes to bonds. Albert Edwards from ScoGen is he: A key part of the Ice Age has been the prediction that US and European 10y government bond yields would fall to levels never previously seen – replicating Japan’s experience. We were told that this would never


Lunatic RBA turns uber-dovish

Via Luci Ellis last night: It’s great to be back at one of my alma maters to deliver the Freebairn Lecture in Public Policy. John Freebairn’s extensive publication record and long history of contributions to public debate speak to his abiding interest in public policy across a broad range of areas. It is indeed an


Lunatic RBA oversteps into fiscal again

No, it doesn’t. So why is it involved in this, via Domain: Reserve Bank governor Philip Lowe has urged key Senate crossbenchers to pass the Coalition’s $158 billion income tax cut package to get more disposable income flowing to stimulate a slowing economy. …In private briefings with the crossbench last week, Dr Lowe acknowledged the


Why the RBA should raise the inflation target to 5%

Monetary madness is sweeping the Australian elite. Let’s start with Professor Warwick McKibbin, at the AFR: There is evidence internationally that well designed infrastructure, with a rate of return that is considerably higher than the cost of funding, increases private sector productivity. …There also needs to be a change in the monetary policy framework. Today inflation


RBA foghorn: Cuts, cuts, cuts!

Via Terry Mccrann today: The economy is struggling, really struggling. It’s going to get help from the Reserve Bank with its official rate cuts, now definitely, plural. But it also needs help and needs help big-time from Canberra — and I stress the broader word Canberra not just simply and simplistically, the government. The government’s


Morgan Stanley: Consumer to hide stimulus under mattress

The nightmare is real, says MS, which lowered its Aussie growth outlook to 1.8% today: The other driver of household spending weakness was the savings rate increasing … In our view this reflects the pressures on household de-leveraging, in an environment of low wage growth, elevated debt and falling house prices. This may also limit the


Just how dumb is the AFR’s rate cuts jihad?

One the craziest Domainfax campaigns in living memory doubled down again today. First, it was Morgan Stanley’s James Gorman: Morgan Stanley chief executive James Gorman has warned central banks that further cuts to official interest rates risk reducing their “firepower” to deal with an unforseen geopolitical crisis. After Reserve Bank of Australia governor Philip Lowe suggested


The RBA is an intellectual coward

Via Phil Lowe last night, who indicated at least one more rate cut is coming: On behalf of the Reserve Bank Board, I would like to warmly welcome you to this community dinner. Thank you for joining us this evening. We value this opportunity to hear firsthand from you about the challenges and opportunities you


Bill Evans: More rate cuts to come

Via Bill Evans at Westpac: As expected, the Reserve Bank Board decided to lower the cash rate by 25bps to 1.25%. This action is very much in line with Westpac’s forecast first set out on February 21, although comes two months earlier than our original timeline. The basis for the RBA decision was “to support


ANZ passes on 18bps of rate cut, CBA and NAB 25bps, WBC 20bps

ANZ has held onto 7 basis points from today’s 0.25% rate cut by the RBA: “In making this decision we have weighed up a number of factors, such as business performance, market conditions and the impact on our customers, including our depositors. “While we recognise some home loan customers will be disappointed, in making this


God defend the RBNZ

Via The Australian: Forget the radioactive fallout from the Hayne royal commission — the nation’s four major banks have a bigger problem to worry about right now. If New Zealand’s all-powerful regulator Adrian Orr has his way, the big four will be passing the hat around for the next five years to raise an extra