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.
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 variablehome 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. The governor of the RBA, Dr Philip Lowe, decided on a low rates strategy amid concerns that escalating political tensions and trade wars could impact Australia’s economy.
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 1.0 per cent, policy makers have few other options in their artillery to stimulate investment and demand.
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.”
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.
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 Rate Movements History
| Date | RBA Cash Rate | Bank Std Variable Rate |
| Feb-2000 | 5.50 | 7.30 |
| Apr-2000 | 5.75 | 7.55 |
| May-2000 | 6.00 | 7.80 |
| Aug-2000 | 6.25 | 8.05 |
| Feb-2001 | 5.75 | 7.55 |
| Mar-2001 | 5.50 | 7.30 |
| Apr-2001 | 5.00 | 6.80 |
| Sep-2001 | 4.75 | 6.55 |
| Oct-2001 | 4.50 | 6.30 |
| Dec-2001 | 4.25 | 6.05 |
| May-2002 | 4.50 | 6.30 |
| Jun-2002 | 4.75 | 6.55 |
| Nov-2003 | 5.00 | 6.80 |
| Dec-2003 | 5.25 | 7.05 |
| Mar-2005 | 5.50 | 7.30 |
| May-2006 | 5.75 | 7.55 |
| Aug-2006 | 6.00 | 7.80 |
| Nov-2006 | 6.25 | 8.05 |
| Aug-2007 | 6.50 | 8.30 |
| Nov-2007 | 6.75 | 8.55 |
| Feb-2008 | 7.00 | 9.00 |
| Mar-2008 | 7.25 | 9.35 |
| Sep-2008 | 7.00 | 9.35 |
| Oct-2008 | 6.00 | 8.35 |
| Nov-2008 | 5.25 | 7.75 |
| Dec-2008 | 4.25 | 6.85 |
| Feb-2009 | 3.25 | 5.85 |
| Apr-2009 | 3.00 | 5.75 |
| Oct-2009 | 3.25 | 6.05 |
| Nov-2009 | 3.50 | 6.30 |
| Dec-2009 | 3.75 | 6.65 |
| Mar-2010 | 4.00 | 6.90 |
| Apr-2010 | 4.25 | 7.15 |
| May-2010 | 4.50 | 7.40 |
| Jun-2010 | 4.50 | 7.40 |
| Jul-2010 | 4.50 | 7.40 |
| Aug-2010 | 4.50 | 7.40 |
| Sep-2010 | 4.50 | 7.40 |
| Oct-2010 | 4.50 | 7.40 |
| Nov-2010 | 4.75 | 7.80 |
| Feb-2011 | 4.75 | 7.79 |
| Mar-2011 | 4.75 | 7.79 |
| Apr-2011 | 4.75 | 7.79 |
| May-2011 | 4.75 | 7.79 |
| Jun-2011 | 4.75 | 7.79 |
| Jul-2011 | 4.75 | 7.79 |
| Aug-2011 | 4.75 | 7.79 |
| Sep-2011 | 4.75 | 7.79 |
| Oct-2011 | 4.75 | 7.79 |
| Nov-2011 | 4.50 | 7.55 |
| Dec-2011 | 4.25 | 7.30 |
| Feb-2012 | 4.25 | 7.39 |
| Mar-2012 | 4.25 | 7.39 |
| Apr-2012 | 4.25 | 7.40 |
| May-2012 | 3.75 | 7.04 |
| Jun-2012 | 3.50 | 6.83 |
| Jul-2012 | 3.50 | 6.83 |
| Aug-2012 | 3.50 | 6.83 |
| Sep-2012 | 3.50 | 6.83 |
| Oct-2012 | 3.25 | 6.64 |
| Nov-2012 | 3.25 | 6.64 |
| Dec-2012 | 3.00 | 6.44 |
| Feb-2013 | 3.00 | 6.44 |
| Mar-2013 | 3.00 | 6.44 |
| Apr-2013 | 3.00 | 6.44 |
| May-2013 | 2.75 | 6.18 |
| Jun-2013 | 2.75 | 6.18 |
| Jul-2013 | 2.75 | 6.18 |
| Aug-2013 | 2.50 | 5.93 |
| Sep-2013 | 2.50 | 5.93 |
| Oct-2013 | 2.50 | 5.93 |
| Nov-2013 | 2.50 | 5.93 |
| Dec-2013 | 2.50 | 5.93 |
| Feb-2014 | 2.50 | 5.93 |
| Mar-2014 | 2.50 | 5.93 |
| Apr-2014 | 2.50 | 5.93 |
| May-2014 | 2.50 | 5.93 |
| Jun-2014 | 2.50 | 5.93 |
| Jul-2014 | 2.50 | 5.93 |
| Aug-2014 | 2.50 | 5.93 |
| Sep-2014 | 2.50 | 5.93 |
| Oct-2014 | 2.50 | 5.93 |
| Nov-2014 | 2.50 | 5.93 |
| Dec-2014 | 2.50 | 5.93 |
| Feb-2015 | 2.25 | 5.67 |
| Mar-2015 | 2.25 | 5.67 |
| Apr-2015 | 2.25 | 5.67 |
| May-2015 | 2.00 | 5.46 |
| Jun-2015 | 2.00 | 5.46 |
| Jul-2015 | 2.00 | 5.46 |
| Aug-2015 | 2.00 | 5.46 |
| Sep-2015 | 2.00 | 5.46 |
| Oct-2015 | 2.00 | 5.46 |
| Nov-2015 | 2.00 | 5.63 |
| Dec-2015 | 2.00 | 5.63 |
| Feb-2016 | 2.00 | 5.63 |
| Mar-2016 | 2.00 | 5.63 |
| Apr-2016 | 2.00 | 5.63 |
| May-2016 | 1.75 | 5.39 |
| Jun-2016 | 1.75 | 5.39 |
| Jul-2016 | 1.75 | 5.39 |
| Aug-2016 | 1.50 | 5.26 |
| Sep-2016 | 1.50 | 5.26 |
| Oct-2016 | 1.50 | 5.26 |
| Nov-2016 | 1.50 | 5.26 |
| Dec-2016 | 1.50 | 5.26 |
| Feb-2017 | 1.50 | 5.26 |
| Mar-2017 | 1.50 | 5.28 |
| Apr-2017 | 1.50 | 5.28 |
| May-2017 | 1.50 | 5.29 |
| Jun-2017 | 1.50 | 5.23 |
| Jul-2017 | 1.50 | 5.22 |
| Aug-2017 | 1.50 | 5.22 |
| Sep-2017 | 1.50 | 5.22 |
| Oct-2017 | 1.50 | 5.22 |
| Nov-2017 | 1.50 | 5.22 |
| Dec-2017 | 1.50 | 5.22 |
| Feb-2018 | 1.50 | 5.22 |
| Mar-2018 | 1.50 | 5.22 |
| Apr-2018 | 1.50 | 5.22 |
| May-2018 | 1.50 | 5.22 |
| Jun-2018 | 1.50 | 5.22 |
| Jul-2018 | 1.50 | 5.22 |
| Aug-2018 | 1.50 | 5.22 |
| Sep-2018 | 1.50 | 5.31 |
| Oct-2018 | 1.50 | 5.34 |
| Nov-2018 | 1.50 | 5.34 |
| Dec-2018 | 1.50 | 5.34 |
| Feb-2019 | 1.50 | 5.37 |
| Mar-2019 | 1.50 | 5.37 |
| Apr-2019 | 1.50 | 5.37 |
| May-2019 | 1.50 | 5.37 |
| Jun-2019 | 1.25 | 5.15 |
| Jul-2019 | 1.00 | 4.94 |
| Aug-2019 | 1.00 | – |
| Sep-2019 | 1.00 | – |
| Oct -2019 | 0.75 | – |
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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