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.
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.
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
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
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
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
Via CBA: And more: Commonwealth Bank’s economics team, which is tipping another 25 basis point cut to the cash rate in August, which would reduce it to 1 per cent, is doubtful that QE will be introduced “in this economic cycle,’’ arguing there is significant stimulus in the pipeline. …CBA estimates that a local QE program
The unstoppable bond rally continues with new all time lows for yields right across the curve this morning: There is still little in the way of curve steepening and belly of the curve is actually inverting more fully: Spreads to the US have begun to widen again as weak local data and Hong Kong combine
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
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
The AFR’s war on rate cuts has shifted gear today, first Jonathon Shapiro: For those who are ultra-careful with their money, the billboards outside bank branches in 2009 advertising 8 per cent deposit rates must have felt like a welcome reward for conservatism. …for now, the savers may lament they are being forced to subsidise
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 it comes two months earlier than our original timeline. The basis for the RBA decision was “to
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
Chanticleer is at it again today: At the end of a huge week for the big four banks, it’s time for those reliant on dividend income to think hard about the longer-term implications of official interest rates being lower for longer. There is no need to panic. But as official rates set by the Reserve Bank
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
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
Via The Australian comes ANZ mulling the end of rate cuts: “Further support for the economy is likely to be required in 2020, given the gathering global uncertainties,” Mr Plank said. “We think the RBA will likely reach for tools other than the cash rate, with explicit forward guidance the possible first choice,” he said. Mr
Via the Kouk: The Reserve Bank finally did it. Cut interest rates that is. In an effort to redeem itself from what is clearly its worst policy mistake since the lead into the early 1990s recession, the RBA has belatedly delivered the 13th interest rate cut in this very long monetary policy easing cycle. It
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
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
There seems to be some confusion in the MB readership about our position regarding rate cuts. Let me clear this up: we support the cash rate being cut to zero; along with tougher macroprudential measures to prevent any rebound in mortgages; this would crash the AUD and force a restructure onto the Australian economy away
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 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
The RBA is out with its rate cut and, alas, it is hawkish: At its meeting today, the Board decided to lower the cash rate by 25 basis points to 1.25 per cent. The Board took this decision to support employment growth and provide greater confidence that inflation will be consistent with the medium-term target. The outlook for
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
Yesterday I noted that AFR monetary hacks have launched a campaign against further RBA rate cuts to preserve bank margins ahead of the good of the economy. That continues today: “Phil Lowe and the RBA board have done well to resist the calls for super-low interest rates,” former Reserve Bank board member Warwick McKibbin says.