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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RBA cuts, launches QE

From the RBA just now: At its meeting today, the Board decided on a package of further measures to support job creation and the recovery of the Australian economy from the pandemic. With Australia facing a period of high unemployment, the Reserve Bank is committed to doing what it can to support the creation of

19

Is global inflation about to surge?

Via Morgan Stanley: …investors were a bit too complacent on the uncertainty surrounding the election outcome, unlikely passage of a fiscal stimulus before the election and second wave of Covid-19…the short answer is that the worst of the correction is over in our view but we still think the next month is likely to remain

17

MSM piles into QE whaaambulance

Some relatively sensible whinging about QE from the boffins today. First, Adam Creighton: Prosperity is never the gift of ­either fiscal or monetary policy and its supposedly wise practitioners. It’s a consequence of technological progress and more efficient allocation of resources. On the former, we’re hostage to fortune. On the latter, we need much more:

8

Time to disband intellectually bankrupt Shadow RBA

Via The Shadow: With Victoria successfully containing the corona virus and lifting stage 4 restrictions, Australia’s overall Covid-19 statistics (infection numbers and death rates) look comparatively benign. The inflation rate, based on the latest ABS CPI estimate, has returned to positive territory, equalling 0.7% year-on-year in the September quarter (after equalling -0.3% year-on-year in the

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Bring on QE and lot’s of it!

The AFR has finally discovered a somewhat more balanced debate about imminent RBA quantitative easing but it has more work to do. On the weekend, the usual suspects had a good whinge: “Further rate cuts would be counter productive to the economy,” Professor McKibbin said, “Why keep cutting rates when we know it does nothing

5

Inflation expectations scrape along bottom

From Roy Morgan Research: In September Australians expected inflation of 3.3% annually over the next two years, up 0.1% points on the record low in August. However, Inflation Expectations are still down a significant 0.7% points on the pre-pandemic month of March 2020… Inflation Expectations have fallen significantly for all Australians during the pandemic, down

13

What spooked the RBA?

More monetary drivel from the AFR yesterday: Considerations on the strength of the Australian dollar and the significant drag on the economy because of Victoria’s lockdown were two key factors that influenced decisions on further monetary easing bias, the minutes reveal. In the September minutes the RBA said: Members recognised that the substantial, coordinated and

10

Bill Evans: RBA to cut and print!

Via Bill Evans at Westpac: The Minutes of the October Board meeting of the Reserve Bank of Australia confirm the key themes of Governor Lowe’s speech which was delivered on October 15. They indicate that the Board had effectively decided to ease policy at the October meeting. One reason for delaying the announcement would have

7

Reinvented RBA whacks Australian dollar again

Finally, ten years late, we are in the global monetary and currency game: The Stance of Monetary Policy in a World of Numerous Tools Christopher Kent[*] Assistant Governor (Financial Markets) Address to the IFR Australia DCM Roundtable Webinar Online – 20 October 2020 Introduction In a world of unconventional policies, assessing the stance of monetary policy is

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RBA has indeed joined the global currency war and thank god for it

Back in 2016, Australian economics titan, Tim Toohey, forecast a new Australian boom: Goldman Sachs has upgraded its Australian dollar and economic growth forecasts. “As we look out to 2017 and beyond, we believe Australia has moved through an important transition point and with it has emerged the prospect of stronger and less volatile real

13

The AFR is completely lost on macroeconomics

Last week I offered a few suggestions to Australia’s league of failing economists in the hope that some might escape the mediocrity of debate that is holding the nation back. Paramount was that they should avoid the Australian Financial Review because, frankly, it has no idea what it is talking about when it comes to

20

Westpac: RBA Governor gives “Game Changer” speech

From Westpac chief economist Bill Evans: I had expected that the events this week would be highlighted by the stunning 11.9% surge in the Westpac-Melbourne Institute Consumer Sentiment Index. That was not the case. RBA Governor Lowe delivered a speech on Thursday to a Banking Conference that was, quite simply, a game changer from the

16

Depressionberg condemns MMT as RBA gobbles his bonds

WTF is this world that we are living in! Via the AFR: Treasurer Josh Frydenberg has strongly resisted suggestions to embrace so-called modern monetary theory (MMT), whereby governments force central banks to print money to fund fiscal expenditure. …”I never thought as a Liberal Treasurer that I would be here with the highest deficit and

6

As carry trades flip negative, has the Australian dollar topped?

Via Credit Suisse: While we had previously looked to fade backups in rates ahead of the election — given our expectation for fiscal stimulus discussions to remain stuck, corporate supply to taper off, and the Fed to keep conditions accommodative — the meaningful change to the election calculus overwhelms these considerations and suggests leaning short