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 shadow wants hold

From the Shadow RBA today: Yet again, there is little news about the domestic and international economies to incite the members of CAMA’s RBA Shadow Board to change their views. The consensus to keep the cash rate at its current level of 2.5% remains strong. The overarching view is that the interest rate sensitive sectors

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Bloxo: Rates to rise in 2014

Here’s Paul Bloxham’s latest in which he argues that rate hikes will be needed in the second half of 2014: Growth is showing further signs of rebalancing – from being mining investment-led to being driven by the non-mining sectors. Low interest rates are lifting the established housing market and this month brought more evidence that the

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Mining cliff to keep interest rates low

By Leith van Onselen The AFR’s David Bassanese has this afternoon doubled-down on his view that the anticipated pick-up in residential building activity won’t be anywhere near enough to offset the hit to growth and employment as the once-in-a-century mining investment boom unwinds, noting that the ensuing economic weakness will keep interest rates low in

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Bill Evans dissects RBA’s tactics and policies

From Westpac’s Chief Economist, Bill Evans, comes the following assessment of the RBA’s tactics and policies, with Evans maintaining his call for further interest rate cuts: The last week has seen some important “events” with regard to helping us assess the Reserve Bank’s current approach to policy. Recall that in the November Statement on Monetary

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Bill Evans sees two rate cuts in 2014

Following today’s Board Minutes from the RBA, Westpac’s Chief Economist, Bill Evans, sees two more rate cuts in 2014 on the back of below trend growth, the stubbornly high Australian dollar, and a weaker than expected housing-led recovery: As expected, the Minutes to the November RBA Board Meeting retained the key statement that  “The Board’s

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Neutral RBA minutes miss the mark

Another opportunity to jawbone the currency was missed today by the RBA with very little mention of the dollar and lots of mentions of the efficacy of interest rates. Accordingly the dollar rose, ensuring the the inefficacy of interest rates. Full minutes below. International Economic Conditions Data released over the past month suggested that growth

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Chris Joye: Rate hikes are coming

More good stuff from from Chris Joye this afternoon: The exuberance in shares and housing will continue for as long as central banks deny savers decent rates of return in safer investments. So how will one know when the worm turns? Look to bond market bandits rationally punting billions on the direction of future rate movements.

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Walsh backs macroprudential, Bassanese bubbles

From Max Walsh at AFR today: Professor Rey, drawing on the experience of the global financial crisis, argues one of the determinants of the global financial cycle is monetary policy in the US, which affects leverage of global banks, capital flows and credit growth in the international financial system. ..She says: “Independent monetary policies are possible

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RBA cuts growth forecast, ups confusion

The RBA’s occasional Statement of Monetary Policy is out and is making its way inexorably towards MB. Here is the money passage: The forecast for the domestic economy has been revised to account for some developments working in different directions. Based on company statements and the Bank’s liaison, mining investment looks like it might decline

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Uncertain RBA holds, bashes dollar

RBA on hold with a neutral bias. Here’s the statement with lot’s uncertainty around the investment outlook and very sensibly directly warning dollar bulls: At its meeting today, the Board decided to leave the cash rate unchanged at 2.5 per cent. Recent information is consistent with global growth running a bit below average this year, with

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Shadow RBA sees rates unchanged

From the Shadow today: Has the Australian Economy Turned the Corner? This month there is not much new information to guide policy. The new coalition government has not announced any big policy surprises, the US government budget crisis was deferred for a further four months (as widely expected), European economic growth remains subdued, and Asian

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Fixed rates rising

From the SMH: All the big four banks have increased some of their fixed rates over the past month…”With interest rates at all-time lows, it’s inevitable that rates will start to rise and while it is too early to call when this will happen, it’s not inconceivable that this could happen next year,” said Alex

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IMF endorses macroprudential (again)

The IMF has produced new economic modelling endorsing the use of macroprudential policy to dampen credit cycles in currency constrained EU countries. The study undertook modelling for two Eurozone countries, and was aimed to examining whether maroprudential policy was an appropriate way to govern credit when neither interest rates nor the currency are not being

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Capt Glenn on the Anglosphere

Pretty boring effort from Captain Glenn this afternoon delivered to the to the Australian British Chamber of Commerce. Nothing of import nor new but a potted history if you have time. It could have been the Dutch who started European settlement in Australia. In their journeys to the East Indies numerous Dutch traders saw the western

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Bill Evans: US debacle means rate cuts

Bill Evans latest dovishness below. The Reserve Bank prudently maintained its easing bias in the October Board minutes. The most important aspect of the minutes was the decision by the Board to retain the following sentence: “Members agreed that the Bank should again neither close off the possibility of reducing rates further nor signal an

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Singapore’s macroprudential on steriods

The movement is spreading fast. Singapore has progressively joined the legion of nations moving to install macroprudential policies to control asset prices and suppress currencies. From Bloomberg: The government this year ramped up efforts to bring down property prices that surged to a record, adopting some of its strictest measures, including a cap on debt at 60

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Bassanese: Next rate move is down

One of the AFR‘s better commentators, David Bassasnese, chimes in today with a forecast for more rate cuts: …My base case remains that the next move in official interest rates remains down, and most likely in February next year. After all, the RBA reaffirmed in the latest minutes that – based on current evidence –

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RBA minutes show easing bias remains

Pretty somber minutes from the RBA’s last meeting out today with the kicker in the final paragraph. International Economic Conditions Members opened their discussion with the observation that, on balance, the data for the global economy had been a bit more positive of late and broadly consistent with growth of Australia’s major trading partners remaining

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Bill Evans: Rates on hold

Nothing really new from Bill Evans but a neat summary of recent data today on why rates are now on hold: Firstly on business, we have already pointed out the evidence in 1996 when a Coalition victory (after a long period in opposition) was greeted with solid boosts to business confidence although business conditions were

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McCrann backs macroprudential

  Terry McCrann has written an important article today that shows just how far this country’s macro debate has moved: BARACK Obama’s nomination of Janet Yellen to be the next and first woman head of the US Federal Reserve is of major significance for Australia. Her certain confirmation to succeed Ben Bernanke at the end