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Q: interest rates ( Answered,   0 Comments )
Subject: interest rates
Category: Business and Money > Economics
Asked by: bourney-ga
List Price: $52.00
Posted: 29 Sep 2005 00:05 PDT
Expires: 29 Oct 2005 00:05 PDT
Question ID: 574117
What have been the trends in Australia?s (cash) interest rate over the
last 10 years?  How does it compare to the Fed funds rate in the
United States over this period?  Is the overall trend similar?  If so,
what might explain this similarity?

please include the reference material that was used to answer the question.
Subject: Re: interest rates
Answered By: omnivorous-ga on 30 Sep 2005 14:05 PDT
Bourney ?

The Australian cash rate is very similar to the U.S. federal funds
rate, as you can see from the definitions below.

?Broadly defined, the term cash rate is used to denote the interest
rate which financial institutions pay to borrow or charge to lend
funds in the money market on an overnight basis .?  By contrast, the
U.S. Federal Reserve Banks says,  ?the federal funds rate is the cost
of borrowing immediately available funds, primarily for one day.?

The Australian cash rate goes back decades, as does the U.S. Federal
Reserve?s fed funds data, as you can see from the short-term interest
rates chart:

Reserve Bank of Australia
?About Monetary Policy?

However, there?s monthly comparable data in this spreadsheet that I?ve
extracted to run some comparisons.  The cash rate ? or the federal
funds rates ? are those that tend to drive other short-term interest
rates.  You?ll see a consistent spread of about 0.5% (50 basis points)
between the overnight and the 30-day rate in Australia. 
Unfortunately, this summary spreadsheet from the RBA site only has
about 7  years of AUS cash market rates -- though it has a longer set
of 30-day rates:

Reserve Bank of Australia
?Interbank Cash Market Rates, 1969-2005?

The U.S. fed funds data comes from here:

Federal Reserve Bank
?Monthly Federal Funds Rate, 1954-2005?


How do the rates compare?  I?ve put them into a spreadsheet in the
link below.  Sheet 1 has the raw data; sheet 2 has a graph showing the
AUS 30-day rate compared to 10 years of U.S. Fed funds data; sheet 3
has the AUS Cash rate compared to U.S. Fed funds over the 7  year

?AUS-US Interest rates, 10-year history?

It?s important to interpret the graphs correctly and as Edward Tufte,
a Yale statistics professor has pointed out in his book, ?The Visual
Display of Quantitative Information,? you shouldn?t let the scale of
the graphs deceive you.  Both the Australian and the U.S. rates have
been very similar.  They?re both low-inflation economies, despite the
fact that from mid-2001 the U.S. rate moved towards the 1% level,
while Australian rates have never gone below 4.25%.

In the long term, you?d expect U.S. rates to rise or Australian rates
to decline if the currencies were stable ? and indeed U.S. rates are
starting to rise now.  One factor behind the U.S. rate rise is SAME
reason Australian rates were held up by the Reserve Bank in 2002 and
2003 ? but I?ll cover that in the next section.



The Central Bank manages the money supply of a country with inflation,
liquidity and employment in mind.  The overnight cash or federal funds
rate is a key tool in manipulating aspects of a country?s economic
system, specifically short-term and long-term interest rates.

These, in term have an impact on international exchange rates, credit
quality, futures contracts, the cost of government borrowing and many
other economic factors.

The prime reason both U.S. and Australian rates track so closely is
that monetary policies are similar, with belief in low inflation (2-3%
in Australia) and use of money supply and monetary policy to achieve
those goals ?

Reserve Bank of Australia

In the most-recent Federal Open Market Committee report to the U.S.
Congress, you'll see that the Federal Reserve is predicting inflation
to be in the 1.75% to 2% range for 2005 and 2006:

Federal Reserve Board
?Monetary Policy Report,? (July 2005)

Yet Australian rates have remained higher, in part because of the boom
in the housing market, mentioned in the quarterly RBA reports on
monetary policy in 2002 and 2003.  As a result, the Australian central
bank held rates up ? and even increased them ? in hopes of stopping

It apparently worked because this is what the bank?s August, 2004
report said: ?The overheating in the housing market last year carried
the potential to destabilise the broader economy, the more so the
longer it continued. There are clear indications, however, that the
situation has now changed. After the rapid increases in house prices
up to the end of last year, the available indicators suggest that
prices declined in the first half of 2004.?

Reserve Band of Australia
?Statements on Monetary Policy?

And that gets us to the reason for the U.S. rate rise ? speculative
activity driving U.S. housing costs up dramatically in 2004 and 2005. 
Enough to concern the chairman of the Federal Reserve, who warned
Congress and bankers about over-heating of the housing market:

Bloomberg News
?Housing ?froth? creates risk for economy,? (Torres, Sept. 27, 2005)

Google search strategy:
federal reserve "fed funds" historical
australia cash interest rate definition
Greenspan froth housing

Best regards,

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