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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The RBA’s excellent day

From Captain Phil: Good afternoon. The Reserve Bank Board met yesterday and decided on a comprehensive package to help support jobs, incomes and businesses as the Australian economy deals with the coronavirus. I would like to use this opportunity to explain this package and to answer your questions. We are clearly living in extraordinary and

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RBA cuts, launches QE into carnage

From the RBA just now: The coronavirus is first and foremost a public health issue, but it is also having a very major impact on the economy and the financial system. As the virus has spread, countries have restricted the movement of people across borders and have implemented social distancing measures, including restricting movements within

2

ECB soothes with billions more

Via the ECB: ECB announces €750 billion Pandemic Emergency Purchase Programme (PEPP) 18 March 2020 The Governing Council decided the following: (1) To launch a new temporary asset purchase programme of private and public sector securities to counter the serious risks to the monetary policy transmission mechanism and the outlook for the euro area posed

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RBA leaks QE

Via the AFR, this sure sounds like a leak: The Reserve Bank will cut the cash rate to a record low of 0.25 per cent and target four-year government bonds in the country’s first major quantitative easing package worth a speculated $50 billion, all designed to contain a blowout in borrowing costs for corporates and

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Today, the fate of civilisation hangs on Phil Lowe. No pressure

Today Phil Lowe faces the most important moment of his career, the gravest moment in his central bank’s history and, to put it bluntly, the most far-reaching moment for the contemporary financial system, as well as the liberal capitalism that it represents, that any Australian central banker will ever face. I am not kidding. Today

20

Hysteria overtakes bond markets

Bond markets. Whoa! Last night Treasury yields jack-knifed again: Why is not clear. There was rumour and scuttlebutt around Trump’s $1tr simulus. But inflation breakevens are crashing: So the Treasury sell makes little sense in terms of a punt on a v-shaped recovery and/or fiscally induced inflation. That leaves us with risk parity fund liquidation,

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Finally RBA prints

From Phil Lowe just now: As Australia’s financial system adjusts to the coronavirus (COVID-19), financial regulators and the Australian Government are working closely together to help ensure that Australia’s financial markets continue to operate effectively and that credit is available to households and businesses. Refer to earlier CFR press release. Australia’s financial system is resilient and it is

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Sleeping RBA snores even louder as ASIC part-shuts ASX

From the RBA and its somnabulant friends: Statement by the Council of Financial Regulators – March 2020 As Australia’s financial system adjusts to the coronavirus (COVID-19), financial regulators and the Australian Government are working closely together to help ensure that Australia’s financial markets continue to operate effectively and that credit is available to households and

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Is the IMF about to displace the US dollar as global reserve?

Via FTAlphaville: There’s growing evidence that markets think central banks have reached the limits of their capabilities. Even if they haven’t, it’s what markets think that really matters. Gillian Tett recounts this point really well in her column today. Read that here. As she notes: But it might also reflect something else: some investors no longer