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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Bow down before the one. The RBA will soon run everything

Mizuho Chief Market Economist Yasunari Ueno: The chief duty of most central banks around the world is the maintenance of price stability. Some countries—including the USA, Australia, and New Zealand—have a dual mandate of price stability and maximum employment. Even in those cases, however, the central bank’s role is to maximize employment within the overriding

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RBA deadly serious about seriously low rates

Via Kieran Davies, Chief Macro Strategist, Coolabah Capital Investments: RBA Governor Lowe delivered a very important speech yesterday on “The recovery, investment and monetary policy” at the AFR’s business review conference. Arguably the biggest take-aways from the speech were: The RBA has materially revised down its estimate of the fully-employed jobless rate – proxied by the non-accelerating

14

Irvine: Somebody needs to be responsible for house prices

When MB first proposed macroprudential policy tools for Australia in 2011, we were looked at like we were from Mars. Unfortunately, that’s how monetary regulators behaved as well. Instead of tightening macroprudential policy from the outset as they slashed interest rates, the RBA and APRA treated them with absolute scorn. The rest is history with

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Savers sacrificed at the low interest rate altar

Last week’s national accounts release for the December quarter revealed that Australian households accumulated a record $187 billion of savings in calendar year 2020 as they cut back spending (due to COVID restrictions) and banked enormous amounts of stimulus.   The problem for these savers is that deposit rates have fallen to a fresh all-time

6

What macroprudential will APRA do?

Via UBS: Housing ‘up-crash’ puts pressure for renewed Macroprudential policies The Australian economy is rebounding very strongly, with data exceeding expectations. With the RBA still maximum dovish, all-time low interest rates and banks willing-andable to lend, Australia is experiencing a housing ‘up-crash’. Interestingly, the Council of Financial Regulators (CFR) is watching housing and “will continue

4

Where next for the taper tantrum?

I have been musing on the likelihood of a new taper tantrum for months. I still think that the inflation pulse that underlies it is temporary. But how much and high long are open questions. To examine the question, Morgan Stanley provides some charts comparing this round with 2013: Taper Tantrum Tracker Across-asset comparison of

20

800-pound RBA gorilla doubles QE pace

A fash note from Kieran Davies at Coolabah Capital: After defending its 3-year bond yield target last week, this morning the RBA doubled its QE purchases of Commonwealth bonds.  In the current QE programme, the RBA buys Commonwealth bonds twice a week and semi-government bonds once a week. The Commonwealth auctions are normally $2bn apiece,

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What will the RBA do about yields?

The RBA meets tomorrow amid some serious bond market and yield turbulence. This is new territory for the bank. It was only the last meeting that it “shocked” markets by extending its QE program. So, is it prepared to shock again?’ Via UBS: Higher bond yields now imply a very material RBA rate hike cycle

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Taper tantrum 2.0 begins as markets catch hysteria virus

What a business cycle this is. Juiced by virus amphetamines it is moving extraordinarily fast. Last year we had the crash down, the crash up, a depression, thumping stimulus and K-shaped recovery, a gold boom and bust on debasement, growth stock bubble and now bust plus value rotation, an alleged commodity super-cycle, and now, one

15

Why the RBA will NOT hike rates before 2024

Markets are today busily repricing the prospects for interest rate rises around the world. This is being driven by the vaccine-led post-COVID recovery, ongoing monetary and fiscal stimulus and rising supply-side inflation associated with bottlenecks and runaway demand for goods while services are suppressed by lack of mobility. Yesterday TD Securities argued that the RBA

1

Beware the illuson of wages growth

Via the FOMC: Despite a sharp spike in unemployment since March 2020, aggregate wage growth has accelerated. This acceleration has been almost entirely attributable to job losses among low-wage workers. Wage growth for those who remain employed has been flat. This pattern is not unique to COVID-19 but is more profound now than in previous

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RBA: Aussie bank offshore borrowing has collapsed

Fresh from the central bank: Christopher Kent, Assistant Governor (Financial Markets) Introduction Today I will discuss some recent developments in the foreign exchange market, and provide some views on the role of the Reserve Bank’s various policy measures. I will also briefly discuss a modest change to the way the Bank will be using foreign

7

Bonds head for vaccine bust

DXY was firm last night: Australian dollar fell: EMFX too: Gold and oil are doing the opposite, which is quite unsual: Miners to the moon: Base metals likewise: EM stocks whooshka: It’s a sunny day in junk land: Treasuries to the knackery: And stocks no like with the miracle of a down Monday: The Treasury

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The RBA will deliver MOAR QE

Will the RBA upsize QE at ay time? This question was asked by Chris Joye on the weekend. It certainly could though I think it is unlikely. The RBA is too conservative for it. Joye channeled Dr Andrew Leigh again: QE has lowered yields by 0.3% and suppressed the Australian dollar: If QE works to

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Dr Leigh smashes RBA QE timidity

For many years Australia has dragged the chin on unconventional monetary policy. Back in 2012, MB campaigned for zero interest rates, QE and macroprudential tightening. This would have shifted the recovery from house prices to tradables, a much more healthy pattern of growth. The RBA was useless for many years on this question, always looking

2

When will bonds be attractive again?

With a short term inflation spike about to land on markets BofA takes a look at the critical bond yield levels that would upset stocks: No more TINA The long-standing bullish mantra for stocks has been “There is no alternative” or TINA. Especially for income investors, given that the S&P 500 dividend yield has been

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Is QE blowing Australian bubbles?

Is QE blowing Australian bubbles? The question has dogged the FOMC for many years. Now, with Australian QE into its second iteration already, the panic is building. Is it justified? Chris Joye argues not: The Reserve Bank of Australia has launched an entirely necessary monetary policy regime that will involve sustained quantitative easing (QE) to