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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Would Graeme Wheeler shift for a million dollars?

Reserve Bank Governor of New Zealand Graeme Wheeler earns $600k per annum. But that’s only in kiwi dollars. If he replaced Glenn Stevens he’d virtually double his salary. That’s got to be tempting even for a Bledisloe Cup tragic. And we need him really badly. The mooted successor to Glenn Stevens is Phil Lowe who,

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More evidence of the dodgy mortgage broker channel

Cross-posted from Martin North. Recent media coverage about mortgage brokers has been quite negative, with allegations of poor ethical standards and false application data being used by some to bolster loan applications. So in this post and in our latest video blog we look at data from our household surveys to portray the current state

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Bill Evans sees RBA doves

From our Bill: As expected, the RBA Board decided to leave the cash rate unchanged at 2.0%. In recent statements, its easing bias was expressed with the sentence “continued low inflation may provide scope for easier policy, should that be appropriate to lend support to demand”. This sentence has been moderated to replace the “may”

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Macquarie: Deposit war looms on funding crunch

From Macquarie comes some good news for savers (except the RBA will snuff it out): Given tightening in the wholesale funding markets we expected to see a step-up in deposit competition. While banks appear to be competing more aggressively for deposits, it appears that competition has remained contained. Our analysis on special deposit spreads suggests that ANZ’s deposit

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Shadow RBA falls behind the curve

Always one to drag the chain on dovish policy, the Shadow RBA is falling behind the rates curve today along with Captain Glenn: More of the Same: RBA Should Hold Rate After last month’s rout, global stock markets bounced back but financial markets remain edgy. The unemployment rate rose to 6%, and inflation, at 1.7%,