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.