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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Previewing CPI

From Deutsche: Our pick for Q1-17 headline CPI is for a 0.6%qoq/2.2%yoy outturn. We expect the average of the core measures to print at 0.4%qoq/1.8%yoy. We see headline CPI printing at 0.6%qoq in Q1-17 (due 26 April), and for the average of the core measures to print at 0.4%qoq. Despite an apparent rise in wholesale

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The Great Australian Property Crash has begun

Drop your linen and start your grin’n, the Great Australian Property Crash has begun. Why so? Regulators have declared war on the Australian property specufestor and he is going to be hunted to extinction. From ASIC yesterday: Mr Medcraft refused to be drawn on what the answers were to the housing dilemma in Sydney and

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RBA monetary policy “exhausted”, yield spreads crack

Via the AFR comes the usually excellent Alex Joiner: “We’ve brought forward all the housing consumption we can – that’s reflected in debt,” said IFM Investors chief economist Alex Joiner. “And that debt has accumulated rapidly, ahead of incomes.” Unlike many other advanced economies that hit the wall after the 2008 global financial crisis, Australian

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RBA holds, warns on bubble

From the Bubble Managers: At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent. Conditions in the global economy have improved over recent months. Both global trade and industrial production have picked up. Labour markets have tightened in many countries. Above-trend growth is expected in a number of advanced economies,

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Dumb Bubble passes the point of no return

The Australian operates in bizarro world today: Australia’s growing dependence on borrowing to buy and build homes has prompted warnings the economy faces a serious shock, increasing the pressure on regulators to act carefully before further tightening the screws on the fragile property market. …Economist Saul Eslake told The Australian yesterday: “A house price fall

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Yawn: Pointless RBA shadow says hold

From the pointless RBA shadow: Australia’s major banks raised mortgage interest rates, citing an increase in global financing costs. Coupled with an unexpected rise in the domestic unemployment, low inflation, and a dearth of other economic news, the CAMA RBA Shadow Board remains convinced that the cash rate should remain at its current level. It

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Could energy inflation drive rate hikes?

The absolute madness of the energy crisis is on display today as Morgan Stanley mulls inflation pass-through to food: Energy costs are escalating rapidly in Australia which we think will lead to cost pressure and potentially a return of food inflation. Consumers will also face higher energy costs, which could dampen sentiment, in our view. The

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Louis Christopher slams “weak” APRA

From Louis Christopher at the AFR: “It’s weak. This is not going to be enough to slow down the Sydney and Melbourne housing boom. The boom continues if this is all it is,” Mr Christopher said. …”What we were thinking they may well have been doing was slowing down the overall investment lending credit growth limit to 5 per cent

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Australian financial conditions tighten

From UBS: Overview This week we update our Australian Financial Conditions Index, first published last year, and also launch a replica FCI for New Zealand. Our FCIs – an average of financial indicators (such as lending rates, the bond curve, the exchange rate and asset prices) – lead GDP growth by about 3 quarters in

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CBA completes rate hike quartet

From CBA: Commonwealth Bank has today announced an increase in its Variable Home Loan interest rates and Viridian Line of Credit products effective Monday 8 May 2017: – The standard variable rate for owner-occupier home loan customers paying principal and interest will increase 3 basis points to 5.25 per cent per annum. – The standard

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ANZ joins stampede to hike rates on specufestors

From ANZ: Principal and interest owner-occupier home lending Variable interest rates for the 80% of owner-occupier borrowers who repay principal and interest on their standard variable home loan remain unchanged at 5.25%pa. Investor home lending The variable interest rate paid by property investors will increase by 0.25%pa from 5.60%pa to 5.85%pa effective 31 March. Interest-only

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Joye: The RBA must hike

From Chris Joye: The once market-orientated RBA now hopes that the bubble blown by its cheap money policies can be cauterised by getting the Australian Prudential Regulation Authority to re-regulate lending via “macroprudential” constraints on credit creation. Setting aside the fact that the RBA years ago warned that such controls may be ineffective when interest