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.
From the RBA: Abstract The Reserve Bank has begun using a new full-system macroeconomic model called MARTIN in policy analysis and forecasting. It is designed to be used as part of the Bank’s existing processes for forecasting and analysis, which use a range of information, models and staff assessments. MARTIN is already being used in
Another one bites the dust: Macquarie’s economics team of Justin Fabo and Ric Deverell say they now expect the RBA to remain on hold until early 2019. While the economy is improving, the unemployment rate remains too high, and wages and price inflation too low for the 25 basis points of rate hikes pencilled in for August and November
From the Guvna today: Thank you for the invitation to speak at this year’s AFR Business Summit. It is very good to be here. The underlying question being asked at this summit is: how does Australian business prosper in today’s changing world? This is an important question to be asking. A strong and prosperous business
Via our Bill Evans at Westpac: As expected, the Reserve Bank Board decided to leave the cash rate unchanged at 1.5%. While we expected that result, we were not expecting any significant surprises in the Governor’s Statement. We were wrong. Readers will be aware that Westpac has been consistently critical of the RBA’s GDP growth
The RBA is out with its March decision and it’s more of the same: At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent. The global economy has strengthened over the past year. A number of advanced economies are growing at an above-trend rate and unemployment rates are low. Growth
Via the AFR: Major lenders are expected to follow the Commonwealth Bank of Australia’s latest round of interest-only mortgage cuts after losing market share because of massively over-estimating the impact of lending caps on their loan books, despite regulatory fears about rising debt and prices, according to analysts. “Expect others to follow,” said Steve Mickenbecker,
Always hawkish: A drop in global share prices of nearly 10% raises concerns about an end to the bull-run and increased volatility. No new domestic economic data of significance has been released since last months’ round. Domestic CPI inflation at 1.9% remains below the Reserve Bank of Australia’s official target band 2-3%, unemployment stands at
Basically the ABS stuffed up: 01/02/2018: This release incorporates amendments to the household and general government (national and state and local) accounts payable and total liability series; and household net worth. The amendments are due to a correction to the implementation of an update of the Australian Accounting Standards Board (AASB 1056 Superannuation Entities) which relates
Via UBS: Jan-18 credit below expected at 0.3% m/m; holding a ~4-year low of 4.9% y/y Private credit growth was below consensus again, with another rise of only 0.3% m/m (UBS & mkt: +0.4%), the equal lowest since Jan-17. This held the y/y at only 4.9%, the equal slowest since May-2014. Investor housing credit slumps
My new favourite economist, Damien Boey at Credit Suisse, has given the Australian outlook a complete rogering in the past few days. It began with his Q1 GDP tracker: Growth momentum slows sharply in 1Q To help with stock selection, sector rotation and asset allocation decisions, it is important to be able to gauge the
From Westac’s Bill Evans: From my perspective, the most important issue is around the Bank’s assessment of the household sector. Recall that in the minutes for the last meeting in December, the Board referred to “household consumption continued to be a significant risk”. Subsequently, they would have been shocked by the national accounts report that
Via the RBA’s Michele Bullock: Thank you for the opportunity to be here today. The title of the summit, ‘Responsible Lending and Borrowing – Risk, Responsibility and Reputation’, really struck a chord with me because there has been much discussion over the past few years about housing prices and the increasing debt being taken on
Dr John Hewson bearing it all up today: What if governments and policy authorities are unable to handle the next global financial crisis? Indeed, what if their declared strategy of “normalising” interest rates actually triggers the next GFC and leaves them powerless to respond? Rather than deal with its structural causes, the response of authorities
From the Guvner in Parliament: My colleagues and I welcome these opportunities to explain our thinking on the Australian economy and to answer your questions. We view it as an important part of the accountability process for the Reserve Bank. Since we last met in August, the improvement in the global economy has continued and
A quick recap today on bond yields. Australian yields are still calm but poised for breakout: US yields are running amok: The local curve has steepened stupidly: So too the US more sensibly: The yield Australia/US spreads are moved wider with the two year close to breakdown and five year already in free fall. The
Via the AFR: As the US 10-year bond rate heads towards 3 per cent, longer-term bonds are looking attractive again, PIMCO’s Newport-based chief investment officer of global credit, Mark Kiesel, said “At that rate it will start to generate interest from insurance companies and pension and funds and importantly, while we do see inflation rising we don’t see it
From the RBA’s Luci Ellis today: I’d like to thank the Australian Business Economists for once again giving me the opportunity to speak to you this morning. Last Friday we released our regular Statement on Monetary Policy. There is a lot in there, not all of which I can cover today. Instead I’d like to take
CBA senior economist, Gareth Aird: The RBA has left both its growth and inflation forecasts unchanged. Core inflation is forecast to lift gradually to around 2% in early 2019 and to 2¼% by mid‑2020. The RBA have a very shallow downward trajectory for unemployment that glides towards a touch above 5% by mid‑2020. We have
Earlier this week, Liar Morrison mooted his desire to see lending standards eased: Financial regulators may dial back home lending restrictions which have helped clamp down on rampant property price growth, if the recent slowdown in property values descends into sharper-than-anticipated falls, the federal Treasurer has signalled. The government was “closely watching” the cooling residential
The first of many back flips to come. Via ANZ: Our expectation of RBA rate hikes in 2018 was built around a couple of things. On the macro side a continued fall in the unemployment rate, stability in core inflation and evidence that wages growth is starting to lift, if only modestly, and, on the financial
Via an RBA head speech last night: Thank you for the invitation to speak at the A50 Dinner. I would like to offer a particularly warm welcome to those of you who are visiting Australia. The A50 Forum provides a unique opportunity to hear directly from leaders in the worlds of business, politics and Australia’s
As Liar Morrison mulls his great hope of unwinding macroprudential, the RBA head has other ideas: Dr Lowe said: “When I talk to my overseas peers and say more than 40 per cent of new loans in the country were to borrowers who didn’t have to make a single dollar of principal repayment, they say, how? Why
Nice little chart with profound implications from Nikko: Tightening cycles have never started with consumer sentiment below 114. Today it is at 105. Prima facie that suggests we’ll need to see post-GFC highs in consumer sentiment to get the RBA off its butt. The final point of note is that when the RBA does tighten sentiment
Via Bill Evans today: As expected, the Reserve Bank Board decided to leave the cash rate unchanged at 1.5% at its February Board meeting. The Governor’s decision statement indicates that the Bank’s central forecasts for growth and inflation remain unchanged and emphasises that the Board will be patient in assessing progress. Policy is firmly on
From the RBA today: At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent. There was a broad-based pick-up in the global economy in 2017. A number of advanced economies are growing at an above-trend rate and unemployment rates are low. Growth has also picked up in the Asian economies,