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 shies from macroprudential tools

Find below a neat speech from the RBA’s Guy Debelle this morning. It’s a great primer on the practicalities of monetary policy dynamics. Of most interest, Debelle closed with the following statement: As some of this quantitative easing generates capital outflows from the country doing the easing, the exchange rate depreciates, boosting local economic activity.

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European crisis ends for banks

Banking Day this morning reported that: Commonwealth Bank tapped into the resurgent mortgage-backed securities market, with a deal that was upsized from A$750 million to $2.3 billion. On Friday, the bank priced its latest RMBS issue, Medallion Trust Series 2013-1. It will pay 80 basis  over the bank bill swap rate on the $1 billion of A1 notes, which have a

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RBA Minutes show easing bias remains

Not much to add beyond the Governor’s last statement. The bank sees the peak in mining investment coming and does not believe the iron ore bounce is sustainable, as well as gradual improvements in interest rate sensitive sectors. It stands ready to cut if those sectors sputter. Minutes of the Monetary Policy Meeting of the Reserve Bank