History of Interest Rates in Australia
By Jason Bryce
The history of interest rates in Australia tracks our national economic development and some of the biggest political and financial events in this country.
On this page you can read about the history of the Reserve Bank, the history of rates and monetary policy in Australia from the early years to today. You can also keep up to date with the latest trending financial news and information on RBA interest rates in Australia and the latest property market outlook at InfoChoice. Compare home loan rates from 99 banks and other lenders at InfoChoice.
The early years
The Commonwealth Bank, established by the new government of Australia in 1911, acted as Australia’s central bank until 1959.
The Great Depression in the early 1930s and World War Two (1939 – 1945) was a time of extreme crisis. The Commonwealth Bank responded by taking on authority to determine interest rates and the foreign exchange rate. The Commonwealth Bank also began to require retail banks to lodge funds with it.
The central banking functions of the Commonwealth Bank were transferred to the newly created Reserve Bank of Australia in January 1960. The Commonwealth Bank continued on as a government owned retail bank until it was fully privatised in 1996. Today Commonwealth Bank is the biggest bank in Australia, by customer numbers, volume of deposits, loans and market capital.
The birth of Australia’s central bank – the RBA
The first Governor of the Reserve Bank was Dr Herbert “Nugget” Coombs, the son of railway worker from Kalamunda in Western Australia.
Dr Coombs studied at the London School of Economics under famous Marxist Harold Laski and later became a leading Keynesian economist at the Commonwealth Bank and the Department of the Treasury in the new national capital, Canberra.
Dr Coombs enjoyed the confidence of Labor prime ministers John Curtin and Ben Chifley as well as Liberal PM Sir Robert Menzies who appointed him to lead the new central bank.
The mission of the new central bank, under the charge of Coombs, was primarily to achieve full employment in Australia, a stable currency and economic prosperity.
In the early 1990’s another important governor of the RBA, Bernie Fraser, added an objective of maintaining inflation in a range of 2 to 3 per cent, on average.
Stagflation of the 1970s
The 1960s were a golden age of economic growth and low interest rates. This period, sometimes referred to Australia’s economic Golden Age, was defined by moderate economic reforms only, a comparatively closed economy protected by tariffs and a currency controls.
These easy years hid growing economic issues that exploded into a confusing mix of high inflation, low growth and higher unemployment in the 1970s.
The RBA and other policy makers had been focussed squarely on lowering unemployment Interest rates on home loans hit 10.38 per cent pa in July 1974 and stayed at around that level until September 1980.
Home loan rates hit a record high 17%
A new Labor government was faced with a foreign exchange crisis in 1984 and floated the Aussie dollar, meaning the market would set the exchange rate, not the RBA.
Economic reforms during the 1980s saw Australia’s tariff walls lowered and productivity lifted through industrial relations reforms. The late eighties were a boom time for lending and as the economy outperformed, inflation rose and the RBA jacked up interest rates to try and control demand.
Unemployment was still a problem and in October 1987 global share markets crashed. The ASX lost 40 per cent of its value.
Standard variable home loan interest rates hit an all-time Australian record high of 17.0 per cent pa in June 1989 and stayed there until April 1990.
By July, Australia was in recession and in November the Treasurer Paul Keating said:
“This is a recession that Australia had to have.”
Inflation target added to rates policy
In the 1990s the Reserve Bank governor, Bernie Fraser, adopted a policy of maintaining inflation within a range of 2 to 3 per cent over the economic cycle.
Inflation had long been relegated to a second order monetary policy issue after employment. However, after the stagflation of the 1970s and excessive consumption in the 1980s, the importance of containing inflation became apparent.
An August 1996 joint statement by the new Liberal treasurer Peter Costello and the new Governor of the RBA Ian McFarlane gave formal government endorsement to the inflation objective.
Australia beats the global financial crisis
In August 2008, mortgage interest rates were 9.62 per cent pa and the RBA’s official cash rate was set at 7.25 per cent. But the world financial system was in meltdown, triggered by the failure of a big merchant bank on Wall Street. A global web of complicated debt instruments that had funded a boom in risky home lending in the USA was unravelling.
The Reserve Bank and the government acted quickly and decisively. In a series of big rate cuts, the RBA took its official cash rate from 7.25 per cent to just 3.0 per cent by April 2009.
The Labor government of Prime Minister Kevin Rudd and treasurer Wayne Swan was elected in 2007 and had initially brought in big spending and tax cuts in May 2008. But by October 2008 Wayne Swan was changing tack and announcing a huge stimulus package of $10 billion in spending directed at boosting retail sales. That was followed by $42 billion in infrastructure and building funds.
Australia was alone among major developed economies in not falling into recession during 2008 and 2009.
The long boom
Since the global financial crisis in 2008, the official RBA cash rate in Australia has hovered around 5 per cent or lower. Standard variable home loan rates reached 7.79 per cent pa in January 2011, according to the RBA but have been on a slide ever since.
In 2019 the Reserve Bank cut the cash rate to its lowest ever recorded point, 1.0 per cent in July. Amid intense competition among lenders, the market leading variable home loan rates fell to under three per cent.
Inflation, rather than being a tiger that must be contained, became stuck well below 2 per cent and the RBA’s task turned again to stimulating the economy.
Donald Trump’s rate cut flows to Australia (1 October 2019)
Central banks, like Australia’s RBA usually act independently of governments. In 2019 the US President Donald Trump began pressuring the independent US Federal Reserve to lower rates to match trading partners. In September the US central bank complied and cut US rates to under 2.0 per cent.
The RBA’s Governor Philip Lowe noted the US cut and signalled an “extended period of low rates” in Australia to deal with unemployment and low inflation. Around the world central bankers and governments are openly discussing more interest rate cuts.
Interest rates in 2019/2020
The coronavirus rate cut
The Reserve Bank continued to cut interest rates again in March by 0.25 per centage points.
The March cut was in direct response to the growing threat of the coronavirus (COVID-19) on Australia.
“The coronavirus has clouded the near-term outlook for the global economy,” said Dr Philip Lowe.
“Global growth in the first half of 2020 will be lower than earlier expected.”
Coronavirus is hurting the education and travel industries said Dr Lowe.
Interest Rates outlook for 2020:
While Dr Lowe had indicated he was prepared to take rates to less than zero, the RBA has since updated that language to indicate a more likely ‘lower bound’ of 0.25%.
That means the RBA has one more rate cut of 0.25 percentage points in its’ arsenal, if required.
In March 2020, the RBA’s statement was clear: expect another rate cut if the coronavirus spreads.
The RBA board said it will continue to assess the implications of the coronavirus for the economy and is “prepared to ease monetary policy further.”
Could Australia get negative interest rates?
Now the world is in uncharted territory. Central banks in Australia and elsewhere are lowering rates or considering lowering rates, to UNDER zero per cent.
With a continuing threat of recession and an official RBA cash rate of just 0.5 per cent (March 2020), policy makers have few other options in their artillery to stimulate investment and demand.
But if depositors had to pay interest, rather than be paid interest, they would surely be motivated to remove savings from the banking system.
Taking their money out of the bank and investing or spending it would have a stimulatory effect on the economy explained an International Monetary Fund research article in February 2019.
The problem, the IMF researchers explain, is that many consumers would simply take their money out and keep it in cash if rates went negative, so they suggest banning cash completely.
“In a cashless world, there would be no lower bound on interest rates,” wrote the IMF’s Ruchir Agarwal and Signe Krogstrup.
“A central bank could reduce the policy rate from, say, [positive] 2 percent to minus 4 percent to counter a severe recession.”
Dr Lowe told a parliamentary committee in early August that he was prepared to take rates to zero.
“It is possible we end up at the zero lower bound.
“I think it's unlikely but it’s possible.”
Since then the Reserve Bank governor has updated his view of negative rates.
“Negative interest rates in Australia are extraordinarily unlikely,” said Dr Lowe in a speech on ‘unconventional monetary policy.’
“Negative interest rates in Australia are extraordinarily unlikely.”
Dr Lowe was quite clear in his November 2019 speech that Australia did not have the financial and economic problems of Europe, where negative rates had been tried.
He was also clear that was not convinced that negative interest rates were worth the problems they caused. He questioned their success as a policy tool in other countries.
The problems with negative interest rates
“Having examined the international evidence,” said Dr Lowe, “It’s not clear the experience with negative interest rates has been a success.”
“While negative rates have put downward pressure on exchange rates and long term bond yields, they’ve come with other effects.”
“Negative rates create strains in parts of the banking system that can impair the ability of some banks to provide credit,” said Dr Lowe.
“Negative interest rates also create problems for pension funds that need to fund long-term liabilities.
“There is evidence they encourage households to save more and spend less, especially when people are concerned about the possibility of lower income in retirement.
“Negative interest rates can also damage confidence in the general economic outlook and make people more cautious,” said Dr Lowe.
Scott Morrison’s cash ban under scrutiny in senate
To combat money laundering and criminal activity, the Morrison Liberal government announced a proposed ban on business cash transactions over $10,000 in July 2019. Critics labelled the plan a precursor to a complete cash ban and negative interest rates.
On 29 February 2020, the Senate Economics Legislation Committee issued a report supporting the Morrison government’s proposed ban on business cash transactions over $10,000.
Greens senator Peter Whish-Wilson produced a dissenting report highly critical of the “cash ban” and agreeing with Ian Love, former director of Credit Suisse, who told the committee that cash supported freedom.
Update 18 March 2020: What is Quantitative Easing
In March 2020, the Reserve Bank is acting in a co-ordinated way with the government to fight off a coronavirus induced recession.
The lowest retail home loan rate listed on InfoChoice in March 2020 is 2.47% pa comparison rate (variable, OO, P&I) from Reduce Home Loans. Home loans rates can’t go much lower. Savers are already suffering the lowest savings account rates in memory.
There is a limit to monetary policy (interest rates) and that has been called the ‘zero lower bound’ by the governor of the Reserve Bank, Dr Phillip Lowe.
When the RBA can’t cut rates anymore but economic indicators are still trending down, the RBA is forced to consider alternative monetary policy options, also known as quantitative easing. This is also colloquially known as ‘money printing.’
In reality Quantitative Easing (QE) can take a few different forms. The RBA is buying bonds and injecting money into debt markets.
The USA, Europe, Japan and other countries have already tried QE with various levels of success, in response to economic crisis times.
Compare home loans from Australia’s banks, credit unions, neobanks and other lenders at InfoChoice.
Interest Rate Movements History
|Date||RBA Cash Rate||Bank Std Variable Rate|
Updated: 4 March 2020
Sources: InfoChoice home loan rate tables, InfoChoice News and Trending News, Reserve Bank of Australia, International Monetary Fund, Sydney Morning Herald, Orange Finance.
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