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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RBA holds

Here’s the RBA statement, nothing new: At its meeting today, the Board decided to leave the cash rate unchanged at 2.5 per cent. Growth in the global economy was a bit below trend in 2013, but there are reasonable prospects of a pick-up this year. The United States economy, while affected by adverse weather, continues

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Bloxo: Rate hikes by year end

From Bloxo today: On hold at 2.50%, as demand is lifting Timely indicators show that domestic demand is rising, as growth rebalances away from the resources sector: this is needed, given the expected fall in mining investment in 2014-15 Inflation has also passed its trough and the AUD is at a more comfortable level for

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Pickering: RBA must use macroprudential

Go for it Callam Pickering at locked-BS: On October 1, the Reserve Bank of New Zealand introduced temporary restrictions on residential mortgage lending, with high loan-to-valuation ratios….Since the restrictions were implemented in October, the New Zealand housing market has slowed rapidly. Both housing loans and house prices are now on the decline and risky lending by

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Bill Evans on the SoMP

Another excellent summary from Bill Evans of Westpac: The key changes for GDP are: growth to December 2013 up from 2.25% in November to 2.5% in February; growth in 2014 up from 2-3% in November to 2.25%-3.25% in February. For underlying inflation: to June 2014 up from 2.5% in November to 3% in February; to

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Why the RBA forecast flat rates

There were two surprises in yesterdays RBA decision statement. The first has been well examined, that it dropped any reference to the need for a lower Australian dollar implying to markets that it’s happy with the current elevated value. The result was obvious with the dollar soaring through 89 cents last night. The bank seems

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Bill Evans on the RBA

From Bill Evans at Westpac: As expected the Reserve Bank Board decided to leave the cash rate unchanged at 2.50%. In addition the Bank has abandoned its ‘soft’ easing bias and adopted a clear neutral bias. That is evidenced by the final sentence in the Governor’s statement: “On present indications, the most prudent course is

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RBA foreshadows long hold

The RBA has released its monetary policy decision for February and it’s a hold. Here’s the statement: At its meeting today, the Board decided to leave the cash rate unchanged at 2.5 per cent. Since the Board’s previous meeting, information on the global economy has been consistent with growth having been a bit below trend in 2013, but

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The three pillars of RBA adjustment

The RBA meets today. With a few notable and intelligent exceptions, market economists are increasingly of the view that the RBA will have to round up its growth and inflation forecasts, and prepare the ground for interest rate normalisation. In this view, rebalancing is underway and the housing and consumption cycle will gain traction and

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The bullhawks are back

The mightiest of the bullhawks is back to claim his belated prey. From Chris Joye at the weekend: Oh dear. The Reserve Bank of Australia’s worst nightmares, which this column has canvassed for some time, could be coming to fruition more quickly than most expected. Forget the future for a moment, and let’s reflect on

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Australian stagflation?

From David Bassanese at the AFR comes an interesting idea I wish I’d thought of (which happens very rarely to me reading Oz media): It is one of the ugliest words in financial markets, but one that might start to confront Australian investors in the coming year: “stagflation”, the combination of weak economic growth and

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Interest rates will not rise

The bullhawks are back. A different flock perhaps but the same species. Today’s CPI has the Kouk calling a rate hike in February and many other others fearing rate rises later this year. They are all fumblingly wrong, again. Inflationary pressures have risen in the economy, not least via tradable inflation. But most of the

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World Bank endorses macroprudential

Below find the key excerpt from a new World Bank report examining the efficacy of macroprudential policies and giving them a broad tick of approval. It’s chock full of gobbledygook but given the increasing likelihood that such tools will be arriving in Australia by year end, I suggest you read it! Broad Policy Toolkit: Monetary

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RBA bribery allegations spread to China

Our most august institution is in the brown stuff, or more to the point, aught to be. From the AFR: Suitcases stuffed with cash were allegedly used to bribe former Indonesian president Suharto to approve contracts to buy the Reserve Bank of Australia’s plastic banknotes, according to a sworn witness statement made by a Jakarta

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RBA minutes repeat dollar mantra

Nothing really new in the minutes. for some reason the dollar popped 15 pips: International Economic Conditions The data released over the past month suggested that growth of Australia’s major trading partners continued around its long-term average, while inflation remained low globally, particularly in the large advanced economies. In China, growth looked to have been a