Wednesday, November 03, 2010

You be unpopular this time, I'll be unpopular next time... Tap banks' phones

Commonwealth: up 0.45 points to 7.81%

Westpac under review, 7.51%

St George under review, 7.43%

ANZ Bank under review, 7.41%

National Australia Bank under review, 7.24%

Australia's biggest bank has humiliated the Treasurer and thumbed its nose at a parliamentary inquiry lifting its mortgage rates by nearly double the Reserve Bank's 0.25 point increase amid calls to tap its phones and covertly record its meetings to find evidence of collusion.

"There would appear to be a pattern of conduct sufficient for the Competition Commission to investigate whether there is an understanding among the banks to the effect that they take turns to announce unpopular hikes," said competition law expert Frank Zumbo from the University of New South Wales.

"Now that Australia has implemented tough new cartel leglislation with jail terms giving the Commission the ability to secretly tap phones and secretly record meetings through the Federal Police, there appears to be a pattern occurring sufficiently seriously for the ACCC to instigate using those powers."

Westpac was the last bank to initiate a round of outsized rate increases in December, drawing fire from the Treasurer but followed a few days later by the Commonwealth and ANZ.

This time the Commonwealth Bank moved first, lifting its standard variable mortgage rate from 7.36 to 7.81 per cent within minutes of the Reserve Bank's announcement, with each of the other banks hanging back preparing to announce moves later.

"It's almost as if they take turns to take the heat"... said independent Senator Nick Xenaphon who last week set up an inquiry into banks, due to report in March. "You have got to ask whether they are treating the inquiry with contempt."

Treasurer Wayne Swan struggled to respond saying it was a "cynical cash grab" and that the Commonwelath would face a "very substantial backlash".

He promised to unveil a new set of reforms to make the banking system more responsive next month.

A Commonwealth bank customer with a $400,000 mortgage will pay an extra $118 per month as a result of the bank's 0.40 point hike. Had it merely passed on the Reserve Bank's rise the extra charge would have been $65.

Commonwealth Bank retail chief Ross McEwan said the bank no longer felt itself bound by Reserve Bank moves, telling ABC radio "the relationship with the Reserve Bank overnight cash rate over the last three years has just about - not quite but just about - become irrelevant".

"The funding areas that we are getting our money from, they do not relate to the Reserve Bank overnight cash rate. That's a position that we have not described well to our customers."

Asked why the Bank did not hold off and wait until the Senate inquiry he said while the bank did "listen to the parliamentarians, we have a business to run and the increased funding costs unfortunately have to be passed through".

Mr Swan pointed to two reforms he said would help customers vote with their feet. New leglislation in force from July 1 will protect mortgage holders form excessive exit fees. But the law applies only contracts signed from that date. His bank-switching package allows Australians to automatically move their deductions when they change banks. Treasury documents show that in its first year fewer than 1900 Australians asked for forms.

It is understood the Commonwealth's moves makes a follow-up Reserve Bank rate rise extremely unlikely. The November rise was intended as a standalone, but Commonwealth customers have instead received something approaching two rate hikes.

Published in today's SMH and Age

Bank Account Switching Package FOI Documents


It is usually said that interest rate rises are like cockroaches - there's never just one of them. But this year's Melbourne Cup Day hike is an exception. The Reserve Bank never planned a quick follow-up, and the Commonwealth Bank's action in effectively doubling the pain has killed the prospect dead.

In his statement released after the meeting Governor Glenn Stevens described the decision to lift the cash rate from 4.5 to 4.75 per cent as an "early, modest tightening". Those words were not meant to mean that more is on the way, although the Reserve Bank does expect to move at least once more over the course of the next year.

They were meant instead to indicate that the Bank is moving early, ahead of an obvious threat to inflation and so feels able to do so modestly. The futures market was last night pricing in a 10 per cent chance of rate hike in November. The Bank believes that is a wild overestimate.

Inflation is tame, but the Bank staff believe it has bottomed and will begin to climb. As supporting evidence they point to robust economic growth in China and an recent increase in spot prices for Australian commodities. On the weekend the BG Group announced a US$15 billion investment in the development of coal seam gas liquefied natural gas in North Queensland, pledging to build a plant half the size of the North West Shelf project in just four years. They are referring to it as "stage one".

The project was important in the minds of the Reserve Bank board members meeting on Melbourne Cup Day. It helped persuade them that business investment was set to boom more than taking up the slack as government stimulus programs wound down.

On Friday the Reserve Bank will publish updated economic forecasts showing that while inflation has been lower than it expected it is set to climb just as it had always expected. The Governor will elaborate on them and his fears about inflation at a parliamentary hearing on November 26.

The Bank believes there are two sorts of mistakes it can make in the setting of interest rates: one is to bring on a recession, the other is to allow the creation of run-away inflation. If judged that if it put up rates there would be no risk of the first, and good chance of helping avoid the second.

Treasurer Wayne Swan acknowledged that the decision was in same way a tribute to the strength of Australia's economic outlook, saying the Bank moved up rates "basically because the economy is growing and the prospects for growth are good, because commodity prices are high”.

Shadow Treasurer Joe Hockey said Mr Swan had “lost control” of the economy.

“The government now owns these rate increases. It has done nothing about banking competition. It has done nothing to put downward pressure on interest rates,” he said.

“The government doesn’t know how to manage the Australian economy and they sure don’t know how to manage Australian banks.”

Treasurer Wayne Swan is due to release updated budget forecasts within weeks confirming that the economy and employment are growing faster than forecast at budget time in the pre-election official forecasts.

The Australian dollar touched 1.0002 US in early European trading, only the second time it has exceeded one US dollar since the float.

“It’s the Reserve Bank’s interest rate approach that’s behind it,” said CMC Markets foreign exchange dealer Tim Waterer. The dollar jumped one US within minutes of the Bank’s announcement.

Published in today's SMH

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