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.


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


Australia-US bond spread blows out

Deutsche has interesting note today examining why the Australian to US bond yield has blown out: The 10Y ACGB/UST spread has widened sharply since the start of October to more than 140bp. Given the debt ceiling impasse in the US this seems counterintuitive. The widening also seems to be more than can be explained by


What Austria did to its central bank deputy

Cross-posted from The Conversation. Media reports about alleged involvement of subsidiaries of Australia’s premier financial institution and regulator, the Reserve Bank of Australia, in bribery cases would disturb every right-minded Australian. After all, though independent, this prestigious arm of the Australian Government is a watchdog of the Australian financial system and is an agency responsible


NAB pushes back next rate cut

Fresh from NAB: Recent RBA statements suggest the central bank is comfortably on hold and we have decided it is more likely that the next easing of policy will be delayed until February. However, the big picture remains intact with the economy expected to under perform over the year ahead, more so for domestic demand,


The integrity of Glenn Stevens

Chris Joye does a good job this morning of summarising the unanswered questions around the RBA scandal: Three important questions remain outstanding. First, has the RBA misled Parliament and the federal Treasury about what it really knew in 2007, as the key whistle-blower claimed on ABC Four Cornerson Monday night? Second, should the RBA have prudently


JPMorgan: RBA will cut next month

Here’s a sensible commentary from Stephen Walters at JP Morgan: The RBA today surprised no-one by leaving the cash rate steady at 2.5%, as all 33 surveyed economists had anticipated. The focus, then, was on the commentary and, here, there also were no bombshells. Having eased two months ago, the statement indicates that RBA officials are


RBA holds rates

No surprises today from the  disgraced Reserve Bank of Australia (DRBA): 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 reasonable prospects of a pick-up next year. Commodity prices have declined from


Shadow Board says stomp on housing

From the AFR: The Reserve Bank of Australia should consider signalling that its next move will be to raise official interest rates amid fears loose monetary policy might fuel a house price bubble, according to a ‘shadow board’ of prominent economists. “For several members of the shadow board, the main domestic concern lies with the


Mitchell backs macroprudential

The list of Australian economists prognosticators backing macroprudential is getting longer every day. It now includes MB, Ross Garnaut, Bob Gregory, Chris Joye, Kouk and the ANZ. Today we are joined by Alan Mitchell at the AFR: State governments, including the late and unlamented Labor government in NSW, have also done their bit to make


ANZ backs macroprudential, NZ to hit investors?

Looks like its bad news, good news around ANZ’s Australian chief Phil Chronican, who yesterday endorsed the sense of macroprudential rules. From The Age: ANZ bank’s Australian boss, Phil Chronican, says tougher credit rules for banks may be a ”sensible” option if house price growth becomes unsustainable, though the property market is currently nowhere near


Bubbles and rate hikes

The Kouk’s recent run of uber-optimism continues today with a call that interest rates are about to rise: The economy is doing well and the financial system is in good shape. That said, the Reserve Bank knows that this owes a lot to very easy monetary policy settings that have been in place for the


Bill Evans: RBA at ease over bubbles

Bill Evans of Westpac sees a still comfortable RBA despite today’s pointed warnings to Sydney: The Reserve Bank has released its Semi annual Financial Stability Review for September. This report is of more than usual interest as it provides the Bank with its most appropriate vehicle for highlighting any concerns around potential property market and


Would macroprudential hit business credit?

Some interesting commentary today from The Australian on possible macroprudential rules: A CONSULTANCY founded by former chief risk experts of two major banks has warned macro-prudential rules to cool house prices may restrict small businesses’ already strained access to credit. …”The fact things have started to move doesn’t necessarily say there’s a bubble,” Mr Auty


Kouk backs macroprudential

From Bloomie: Faced with a scary housing bubble not terribly unlike that in the U.S. five years back, Governor Graeme Wheeler should be tapping the brakes now, and hard, or so holds classical monetary theory. Doing so, however, would jeopardize the nation’s 2.5 percent growth amid general global uncertainty. Instead, Wheeler is conducting an experiment:


Bloxo swings and misses on macro-prudential

By Leith van Onselen For the second week in a row, HSBC’s chief economist, Paul Bloxham, has published an article in the AFR weighing-in against macro-prudential curbs on higher risk mortgage lending: The recent adoption of [macro-prudential tools] in New Zealand will no doubt be of interest to Australian authorities, given the similarities between institutions


The RBA can learn from straight-talking RBNZ

By Leith van Onselen The Reserve Bank of Australia (RBA) and the Reserve Bank of New Zealand (RBNZ) could not be more different. The RBA’s speeches and commentary often feel like they have come directly out of a bank’s economics/marketing department, aimed squarely at appeasing foreign bond investors, rather than telling it as it is.


Bloxo bashes macroprudential policy

As the housing debate heats up, Bloxo weighs in against macroprudential policy: Paul Bloxham, who is the chief economist at HSBC in Australia, said the limits on bank lending being introduced in New Zealand would not work. Mr Bloxham made his comments after Australia’s banks were this week warned against taking on risky loans in


Markets begin pricing rate hikes

Through this year a coterie of glass-half full economists has been calling the bottom of the interest rate cycle. They’ve been wrong of course and throughout interest rates markets have clearly signaled as much, never quite giving in to the bulls. Below is the 12 month interest rate forecast from Credit Suisse: On a couple


Pascometer burns red on more rate cuts

When will the counter-contrarian Pascometer ever fail us? Today it burns bright red on more rate cuts: The Reserve Bank aviary appears to house neither monetary hawks or doves – just penguins sitting pat despite today’s weak retail sales, focusing instead on the present low interest rates doing their stuff in the housing market and


RBA holds, easing bias gone

The RBA is out with its determination for September and it’s no move. Here’s the statement: 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 reasonable prospects of a pick-up next year. Commodity prices


RBA: House prices “a long way” from a problem

While Tony Abbott is busy embracing the Swan/Gillard “it’s all good” economic narrative, the Reserve Bank  has taken its jawboning campaign to New York via the WSJ: The Australian dollar is still too high and remains a brake on economic growth, but it is likely to fall further in coming months, a Reserve Bank of


Households expect rising rates

Westpac is out with a new expectations note, this time about interest rates: The Feb, Jun and Aug Westpac-Melbourne Institute Consumer surveys include an extra question about expectations for mortgage rates over the next 12 months. The Aug survey showed more consumers expect rates to rise or be unchanged than to fall. The results show


Westpac goes 28bps

From BS: Westpac Banking Corporation will exceed the Reserve Bank of Australia’s 25 basis points cash rate cut, dropping home loan rates by 28 basis points. The move lowers its headline standard variable mortgage rate cut to 5.98 per cent, effective August 19. National Australia Bank Ltd, Commonwealth Bank, ING Direct, Bank of Queensland and