Friday, March 28, 2008

Reserve to banks - its okay to lift your rates

A rift has developed between the Treasurer and the Reserve Bank over interest rates with the Bank defending the banks the Treasurer has attacked for excessive rate rises.

Addressing the Euromoney Financial Markets Innovation Congress in Sydney the head of the Reserve Bank Glenn Stevens said yesterday he could understand why Australia's banks had increased their rates by more than the Bank had increased its cash rate and said it would be unrealistic to expect anything else.

“The presumption that their lending rates should and could move only in line with the cash rate isn't really realistic,” Mr Stevens said.

“We have of course seen bank lending rates moving independently of the cash rate. I think that's just life in this environment"...

The cost to banks of raising funds internationally had moved independently of the Reserve Bank's cash rate “in a way which was that that uncommon over the longer run of history but has not been that normal in the last five or six years.”

Earlier this month Westpac, the Commonwealth, the ANZ, the National Australia and the St George Bank lifted their mortgage rates by between 0.30 per cent and 0.38 per cent, well in excess of the 0.25 per cent increase in the Reserve Bank's cash rate.

In January - without any trigger from the Reserve - they lifted their rates by between 0.10 and 0.20 per cent.

At the time the Treasurer Wayne Swan attacked the banks and the ANZ Bank in particular alleging that its 0.20 per cent increase was “excessive and could not be justified”.

He called on the bank's customers to “vote with their feet” and shop around for a better deal.

At his instigation the Treasury and the banks are developing a new procedure that will make it easier to switch mortgages between banks.

But the Reserve Bank Governor's remarks, backed up in the text of his 70-page Financial Stability Review also released yesterday explicitly endorse the actions of the private banks.

The Review says that had Australia's mortgage lenders not increased their rates by as much as they had “their mortgage business would be unprofitable”.

The Governor also said that the Reserve Bank had “taken account of these shifting relationships” in setting its cash rate, implying that the Bank would have tightened interest rates by more had the private banks not done some of the work for it.

“The Reserve Bank is certainly not unhappy with the banks raising rates,” said the chief economist at Lehman Brothers Stephen Roberts on hearing the Governor's remarks.

“If the banks hadn't raised their rates by more than the Reserve, it would have had to raise its cash rate further.”

The Treasurer refused to back away from his condemnation of the private banks in the face of the Governor's support, saying that “rising interest rates hurt working families”.

“That's why we have acted to boost competition with our bank switching package - so customers can vote with their feet,” he said.

“We believe the community will reward those banks who best shield families from the increased costs of borrowing flowing from the US sub-prime crisis.”

“Similarly banks who don't act in a way which their customers think is reasonable will now run a greater risk of losing customers.”

In its Financial Stability Review the Reserve Bank also

. said that the global financial system was under more strain than at any time since at least the early 1990s;

. claimed interest rate margins had widened significantly in many developed countries; and

. said that the Australian financial system was better positioned to deal with the current difficulties than those of many other countries.

5 comments:

Willowtree said...

As a non-economic, pragmatic, ordinary person, I have to wonder that if there is no fixed link on interest rates between the Reserve and the banks, why do the Banks always raise and lower their rates when the Reserves does?

Further, if there really is no firm connection between the Reserve and the Banks, then why are we paying the boffins at the Reserve to manage things.

I do have one more question, are interest rates the only tool that the Reserve has, or is that all that the media are interested in reporting?

Andos said...

Here is my layperson understanding:

The Reserve Bank of Australia has control of the supply of Australian Dollars. They lend this money to the 'banks' at a certain rate of interest, which at the moment is 7.25% p.a. It is the flow of this money that keeps the economy growing, so the Reserve can slow growth by increasing this interest rate.

As far as I know, that's all they've got.

Stilgherrian said...

It's amusing to see this reported as a "rift" — a yawning chasm like The Great Rift valley.

It's just two different people with two different agendas (a central banker wanting to achieve his economic aim versus a politician wanting to remain "popular") holding different opinions and expressing them.

Graeme said...

Yes, but look deeper into the different agendas. The PM would like banks to be moderate in their treatment of "working families"... but the RBA is positively gleeful that banks are putting rates up faster than RBA increases. The reason is that the more the 'greedy' banks do it by themselves, it saves the RBA a lot of heartache and conflict with the new government... because they can all point the finger at each other.

Peter said...

Indeed.

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