Wednesday, May 02, 2012

Private banks are infuriating the RBA. Why it went big.

Home and business borrowers are likely to get just two thirds of the 0.50 point interest rate cut delivered by the Reserve Bank yesterday after the Bank of Queensland went out ahead of its rivals and delivered only 0.35 points.

The bank’s decision to cut its variable rate to 7.11 rather than 6.96 per cent will deny a customer with a $300,000 mortgage rate $28 per month.

Age calculations suggest that if all of the banks withheld as much of the cut as the Bank of Queensland they would hang on to an extra $1.2 billion per year.

RateCity chief executive Damian Smith said none of the big banks was likely to show its hand until the ANZ announced its decision at its scheduled rates review on Friday May 11.

“They will allow ANZ to play it’s new role as unofficial price-setter,” he said. ‘‘The signals from the big four suggest that they will try to hold on to part of this cut.”

The new practice adopted by the big four this year of reviewing and adjusting thier rates independently of the Reserve is infuriating the Bank.

The Age has learned that one of the reasons the Reserve Bank went for a big cut of 0.50 points yesterday rather than a more traditional 0.25 with the option of a followup was a concern that each time one of the big four adjusted its rates separately from the Reserve consumer and business and confidence took a hit.

The Bank believes a ‘drip feed’ of negative news about small adjustments (such as the ANZ’s two recent increases of 0.06 per cent) is negating the effect on confidence of its bigger cuts in the overall level of rates.

By cutting once by 0.50 points rather than twice by 0.25 the bank believes it can cut through the ‘noise’ of multiple decisions by private banks...

The big bank’s new practice of not immediately responding to the Reserve Bank left Treasurer Wayne Swan unable to shame banks for not passing on cuts as he has done in the past.

During as break from budget preparations he told journalists in parliament house bank customers would be “very angry” if the cut was not passed on in full.

“Consumers will expect that, but the fact is that if they are unhappy with their financial institution, people can go down the road and get a better deal and indeed they have been doing so.”

If fully passed on the 0.50 cut in the Reserve Bank cash rate will save a borrower with a $300,000 mortgage $96 per month. If only partly passed on as done by the Bank of Queensland it will save $68 per month.

Private bank analysts believe that withholding 0.10 or 0.15 points of the 0.50 cut would complete the process of restoring bank margins to where they were in mid 2011 before wholesale borrowing costs ballooned.

Announcing the board decision Reserve Bank governor Glenn Stevens hinted he expected the private banks to soon stop widening their margins saying their wholesale funding costs had “declined over recent months.”

Contributing the Bank’s decision to cut rates 0.50 points rather than 0.25 as it had been considering a month ago was a feeling economic indicators have weakened. It believes the inflation figures released ahead of ANZAC day show evidence of deep discounting by retailers desperate to move stock.

The Bank made its decision taking into account what it knows about next week’s budget, meaning it does not necessarily expect to cut rates further in response to it. Futures traders were last night pricing in cuts totalling a further 0.50 points in the next three months.

In today's Canberra Times, Sydney Morning Herald and Age

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e-girl said...

Only a minority have mortgages. A large, and increasing number of people are savers. We are now at the point where demographic shifts mean that it will be savers, not debtors, who will be the larger swing voting block.

Furthermore, if I buy shares and they go down in value, then I suck it down and deal with it. Why should people who pay too much for property be a protected class?

Japan is now 20 years and counting into a rolling recession. They attempted to prop things up. Indonesia, Korea and other Asian nations let bad debts go bad, tolerated some sharp short term pain, then recovered quickly, and now are in much better shape.

Japan's malaise or Indonesia's dynamism: that is the choice we will soon confront. I hope we have the maturity to accept that our society has made economic mistakes, suffer the acute pain with equanimity, and hence enter another decade in good shape.

I fear we won't, because of our obsession with mortgages and property prices.

csning said...

Japan has had 1.6% per capita growth for the past 10 years, which compares favourably with other advanced countries. (US is 0.8%). It had a lost decade, not a lost 2 decades.

Indonesia is a particularly bad example. It suffered the most among the Asian countries during their crisis - riots and rapes, and huge downturn in the economy. Trust me, it would have been better to be Japanese than Indonesian in the late 90s. Malaysia imposed capital controls and recovered much quicker compared to most everyone else.

Anonymous said...

The civil unrest in Indonesia was the usual violence along religious and ethnic lines against the Chinese and other non-Muslim minorities. It will happen again, and we should be ready to serve as a refuge for those people, IMO.

Pretty much the entire developed world has under whelmed. Maybe this is part of a maturing process, at least until something new changes things. Large parts of humanity have made rather rapid progress, and some of those parts were caught up in the Asian Financial Crisis, while Brazil had its own challenges.

The USA is currently attempting to support the banks and other firms that acted recklessly and largely caused this mess. Not only is this hurting them economically, the spectacle of the powerful and well-connected being bailed out while millions of businesses go under is doing grievous harm to the social fabric there.

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