Where does Australia sit in the wide world of interest rates?
Australian interest rates are at a record low, in part because global rates are also at or near historic lows. While the goals of the RBA’s monetary policy are domestic, international factors often influence local decisions.
Several signs over Christmas and the new year pointed to the Reserve Bank of Australia cutting rates to a new record low. But an unexpected – and welcome – drop in the unemployment rate to a nine-month low of 5.1 per cent appears to be a big factor in the decision to hold rates at 0.75%.
This is still a record low for our nation. How does Australia’s interest rate compare to other countries? Do certain central banks across the globe lead the charge when it comes to decision making? And which international organisations influence decisions here?
Thanks to a massive export market that deals heavily with emerging markets like China, and our nation’s continued investment in a growing range of foreign assets, the Australian economy is more integrated than ever into the global financial system.
Being this open to overseas markets has a range of benefits – including readiness for increased international investment when rates are cut in other countries. But it also means that the economy is further exposed to changes in global financial conditions, which need to be taken into account when the RBA makes its monthly call on rates.
And the central banks of some countries, as well as major global financial organisations, have more sway than others.
Running the global gamut
In recent history, interest rates across the globe have consistently trended downwards. But despite plenty of cuts, not every nation is seeing the record lows we’re experiencing in Australia. Rates span a wide spectrum around the world.
Since December, the Central Bank of Argentina has cut interest rates several times – from 63% to 50% – in an attempt to curb inflation and reactive a stagnant economy. In second place on the global interest rate leaderboard is Zimbabwe, whose central bank recently cut rates to 35%, down from a record high of 70% in September 2019.
That’s a huge contrast to the US, where interest rates are currently set at 1.75%. Australia sits in the bottom third of the list, with the RBA’s recent cuts to 0.75% putting us on par with the UK.
At the lower end of the scale, several nations have rates sitting at zero – including the 19 Euro-adopting countries whose rates are governed by the European Central Bank (ECB); and Sweden, whose central bank recently pushed rates out of the negative territory for the first time in several years.
In sub-zero territory, the Bank of Japan currently has rates set at negative 0.10%, while Denmark and Switzerland both sit lower still with rates at negative 0.75%.
“The global reaction to the 2007-08 financial crisis showed that banks across the world are willing to work together to enact major change in desperate times. And several central banks tend to lead the charge.”
Follow the financial leaders
While the decisions made by individual central banks are influenced by myriad factors at home and abroad, the global reaction to the 2007-08 financial crisis showed that banks across the world are willing to work together to enact major change in desperate times. And several central banks tend to lead the charge.
For some time now, the US Federal Reserve has been seen as the most influential central bank on the planet, and with good reason. The US dollar is part of approximately 90% of all global currency transactions, so monetary decisions made by the ‘the Fed’ has a sweeping effect on the valuation of many currencies across the globe.
And the US isn’t the only country with a central bank of major influence, with the ECB and the People’s Bank of China also leading the charge when it comes to monetary policy across the globe. The top three central banks oversee a combined economy valued at almost US$48 trillion – well over half of the world’s 2018 GDP.
But it’s not always the territory of these super-sized economies to try new things when it comes to interest rates. Take, for example, Sweden’s central bank landmark adoption of sub-zero rates on bank deposits in 2009
A sphere of international influence
The 19 countries under the governance of the ECB withstanding, each nation’s central bank is responsible for decisions regarding interest rates. But three major international organisations can influence those decisions, too.
Established in 1930, the Bank for International Settlements (BIS) is owned by 60 of the world’s central banks, representing countries that together account for about 95% of global GDP. It was initially founded to collect, administrate and distribute reparations that were imposed on the German Government by the Treaty of Versailles after World War I.
That task completed, the BIS transitioned to an organisation providing logistical support and economic policy analysis to the world’s central banks and facilitating collaboration between its members.
The World Bank, based in Washington D.C., provides loans and grants to the governments of poorer countries for capital-intensive development projects. Under the leadership of US economic analyst David Malpass, the World Bank regularly publishes research and reports on a range of economic issues – including interest rates.
Also based in Washington, the International Monetary Fund (IMF) is the third major global organisation that has sway (and say) over what central banks are doing. It’s designed to foster international trade, lower unemployment and poverty and promote economic growth.
IMF managing director Kristalina Georgieva has made several public statements on interest rates around the world since joining the organisation in late 2019.
Ultimately, the global economic environment has been a huge factor in driving decision making regarding monetary policy in Australia, up to and including the record low rates we have today. And unless something changes drastically at home or abroad, the wider world will continue to influence the RBA from now on.