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.


Bill Evans on the minutes

From Bill Evans: The minutes of the March meeting of the Reserve Bank Board contain no real surprises. It was noted in the Govenor’s statement which was released straight after the March 4 meeting that the Australian dollar remained high by historical standards. That was a change from the February statement which excluded any assessment


RBA discussing macroprudential

The RBA minutes are out. find below with highlights. International Economic Conditions Growth of Australia’s trading partners in late 2013 was close to its average pace of the past decade. Inflation in the major economies remained low. The Board noted that recent data suggested that the US economy may have slowed a little from the


Kouk: RBA to hike in May

From the Kouk today, who has slaked the Bill Evans tonic to the max: Despite more bank economists rolling over and flipping their forecasts for interest rate cuts for interest rate hikes, financial markets are yet to price in those higher rates. Indeed, for the next few months, the futures market is still pricing in


Bill Evans pulls his rate cuts

Fresh from Westpac: Our dominant theme in this cycle has been that a weak labour market would undermine consumer spending which in turn constrains investment, employment and incomes. Businesses react negatively to soft demand; an uncertain global environment and a “still high” AUD. Those forces are expected to be complemented by a number of known


Forward guidance gets BIS thumbs-down

From the FT: Efforts by central banks to spur economic recovery by providing guidance on what will happen to interest rates could endanger the global financial system, economists at the Bank for International Settlements have warned. Investors are being encouraged to load up on risk because they believe forward guidance will warn them well in


Michael Pascoe endorses macroprudential

Mr Michael Pascoe, well done: Reserve Bank governor Glenn Stevens brought (metaphorically) his hose to this morning’s House of Representatives economics committee hearing and proceeded to use it on every issue thrown at him in the first session – except for households’ housing debt. Stevens said household credit growth for housing of 5 or 6


Capt’ Glenn sees rebalancing!

Here’s what he said in the proxy Parliament of the Sydney Masonic Centre fronting the House Economics Committee. Madam Chair Members of the Committee Thank you for the opportunity to meet with you today. When we met with the Committee just prior to Christmas, I suggested that, taking an international view, 2013 could be described as


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


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


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


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


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


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


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


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