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.

6

Bloxo: Rate hikes this year!

From Bloxo today it’s unsurprisingly all rebalancing and rate hikes: The Australian unemployment rate fell to 5.8% in March (market had 6.1%) to be at its lowest level since November last year. Employment rose by a solid +18k jobs in the month (market had +2k jobs) and the participation rate declined to 64.7%. The main

13

IMF backs macroprudential for asset prices

The IMF again underlines just how slow our local regulators have been to understand their new normal with a new staff note endorsing various unconventional policy tools today: The global financial crisis challenged the existing monetary policy paradigm. Before the crisis, dangerous financial imbalances grew under stable output gaps and low inflation. After the bust,

18

The confusion of Glenn Greenspan

Another day, another change of direction from the RBA governor. After treating us all to brutal dollar jawboning a few months ago, we switched to hands off the currency. In Hong Kong last week it was boom time for recovery but today it’s struggling green shoots. I’ve lost count of how many times the Governor

55

RBA ‘hopes’ as competitiveness chokes

It’s not yet hysteria, but there’s definitely an edge creeping into the national discussion surrounding interest rates. The latest to lean against the RBA is “business”, or so described by locked-BS, via a number of lobby groups: …Housing Industry Association senior economist Shane Garrett says it is extremely important that low interest rates are maintained,

34

Barclays: House prices to trigger early rate hike

The AFR has some Kouky reading from Kieran Davies, chief economist at Barclays Bank Australia: “The RBA now seems less comfortable. That said, the governor still seems sceptical of macro-prudential policy, suggesting that ‘prolonged use’ of prudential tools indicates that interest rates are too low…The Sydney housing market is the canary in the coalmine for

5

Goldman and JPM reiterate rate cut call

From Tim Toohey at Goldman Sachs: Today’s speech reinforced that the RBA has set quite a high hurdle for further policy easing, suggesting that the RBA cannot be expected to “fine tune” the recovery, particularly in regard to non-mining investment. Governor Stevens’ effort to downplay the stronger 4Q2013 CPI, inflation pressures more broadly and the

15

Pickering: Macroprudential now!

From locked-BS comes sense from Callam Pickering The RBA minutes, released yesterday, suggest that macroprudential policies are gaining traction among senior officials and members of the board. At its March meeting, members discussed the experience of other countries that have utilised macroprudential policies and their possible application for Australia. …A recent Freedom of Information request

2

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

1

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

9

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

16

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

0

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

12

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

10

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