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.


Already time for more macroprudential?

Via Westpac: PulseAugust2017 ― Getting a precise fix on Australia’s housing markets remains tricky. Sentiment and lead indicators continue to point to a material slowdown and turnover is showing a renewed decline. However the picture around price growth is much less clear cut, with some moderation overall but trends varying greatly across capital cities –


RBA minutes perfectly neutral

From the happy idiots: Domestic Economic Conditions Members commenced their discussion of the domestic economy by noting that the June quarter inflation data had been in line with the Bank’s expectations and provided further confirmation that inflation had increased since 2016. Underlying inflation was ½ per cent in the June quarter and headline inflation was only


CBA cash profit nearly tops $10 billion

by Chris Becker Money laundering scandal? What money laundering scandal? The biggest division of Megabank, the former government owned division, just posted its eighth record high profit, slightly beating expectations. More from Bloomberg: Cash profit, which excludes one-time items, rose 4.6 percent to A$9.88 billion ($7.8 billion) in the 12 months ended June 30 from


RBA Statement on Monetary Policy – August 2017

By Gareth Aird, Senior Economist at CBA: Key Points: The RBA has shaved a little from their near-term growth forecasts while medium-term projections are broadly unchanged. Headline inflation forecasts have been nudged up while core inflation forecasts have been left unchanged. The RBA have a shallow downward trajectory for the unemployment rate that glides to


RBA leaves rates on hold

by Chris Becker Well there it is, the RBA has left its cash rate unchanged at 1.5% for the twelfth month in a row! Quelle surprise! Statement by Philip Lowe, Governor: Monetary Policy Decision Number2017-15 Date1 August 2017 At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent. Conditions in


Is the RBA in neutral or reverse?

by Chris Becker The RBA has kept its cash rate at an historic low of 1.5% since August of last year and in the doldrums for over five years, with many commentators suggesting this is acting as a huge stimulus effect on the economy: The housing economy has definitely seen the benefit of low interest


Owner-occupier mortgage rate hikes accelerate

Via AFR: Westpac’s two-year investor principal and interest loans will increase by 31 basis points to 4.39 basis points. Rates on four and five-year rates will fall by up to 10 basis points. Westpac owner-occupier interest-only fixed rates will rise by 13 basis points over one to five-year terms. Its owner-occupier principal and interest fixed rates will


CPI sags

No cigar for CPI: JUNE KEY FIGURES Mar Qtr 2017 to Jun Qtr 2017 Jun Qtr 2016 to Jun Qtr 2017 Weighted average of eight capital cities % change % change All groups CPI 0.2 1.9 Food and non-alcoholic beverages -0.2 1.9 Alcohol and tobacco 0.8 5.9 Clothing and footwear -0.3 -1.9 Housing 0.3 2.4


Of course APRA should regulate shadow banks, and hard

The credit-addled AFR comes out swinging for shadow banks today: Shadow banks will protest over the extensive new powers being given to the prudential regulator which may curb their lending, increase funding costs and threaten to exacerbate the severity of any housing market downturn. Big non-bank lenders such as ASX-listed Pepper Group, Resimac, Firstmac, Latitude


Bowen announces royal commission into Dumb Bubble

Via the AFR: Mr Bowen cited three “compelling” reasons for the new look at the financial service regulator, the Australian Prudential Regulation Authority (APRA) and the corporate regulator, the Australian Securities & Investments Commission (ASIC). These are Australia’s soaring household debt driven by an investor-led property boom; a raft of “ad hoc” powers given to


Interest-only smash shifts to owner-occupiers

After last month’s pounding for inventor loans, we’re into phase two today: Bankwest, a subsidiary of Commonwealth Bank of Australia, is slugging existing interest-only owner occupiers with increases of 35 basis points, in the latest move to rein in higher risk loans. The lender is decreasing lending on selected principal and interest products by up


Big Banks trample APRA pansies

Dalian has just flopped into the positive today: With Big Iron down a little: Big Gas is up a bit as one of Australia’s most evil firms, STO, gouges the entire east coast for better profits: Big Gold is still sickening: Big Banks are trampling the APRA pansies: As Big Liar trades sideways: Another ethicists


APRA hikes bank capital

As expected: This Information Paper sets out the Australian Prudential Regulation Authority’s (APRA’s) conclusions with respect to the quantum of additional capital that might reasonably be expected to be required for the Australian banking sector to have capital ratios that are considered ‘unquestionably strong’. Reflecting the social and economic cost of the global financial crisis,


McKibbin turns inflatonista

Via the AFR: In what would be a radical departure from a system that has served since the mid-1990s to curb the rampant inflation of an earlier generation, Professor Mckibbin argues strict inflation targeting has run its course as credible policy making tool. “Inflation has been a good intermediate step because it tied down price expectations


Bill Evans hoses RBA hawks

From Bill Evans at Westpac: The most important result from the minutes of the monetary policy meeting of the RBA Board was to finally nominate the Bank’s estimate of the “new neutral real interest rate for Australia”. In other countries it has been recognised for some time that the neutral rate has fallen particularly since