More interest rates gubbish in the media

With an interest rate cut all but announced for tomorrow, I have been bemused to observe the public debate on interest rates once again focus on a red herring. Treasurer Wayne Swan has taken the brave and perhaps politically unusual step of declining to demand that Australia’s banks pass on the hypothetical interest rate cut to consumers. Shadow Treasurer Julie Bishop has taken precisely the opposite tack, criticising the government for not demanding that the banks pass on the cuts:

Reserve Bank governor Glenn Stevens has reportedly told Prime Minister Kevin Rudd that squeezing the banks too hard could make it unprofitable for them to lend and push the Australian economy into recession.However, opposition treasury spokeswoman Julie Bishop said passing on the full RBA cut would help keep people in jobs and the Australian banking sector stay strong.

“One of the most important ways to keep our financial sector strong is to ensure that Australians keep their jobs so that they can pay off their mortgages … their bank loans,” she told reporters in Perth.”

And that is why if there is an interest rate cut tomorrow it should be passed on in full so that people can keep their jobs and keep paying off their financial obligations.”

This debate raises some interesting questions about what Commonwealth Treasurers should and shouldn’t do, or perhaps more interestingly, what they realistically have the influence to do. Should Wayne Swan really be getting on the blower, as Julie Bishop seems to be suggesting, to the chiefs of the big five tomorrow and demanding that they immediately pass on the hypothetical cut to consumers? Does Julie Bishop, a so-called economic rationalist, have so little faith in the market that she feels the Treasurer needs to instruct individual private organisations on how they run their business? Put simply, it is an absurdity.

There are three points worth making here in rebuttal to Bishop’s foolishly populist demands:

1) It is not the Commonwealth Treasurer’s role to attempt to run the business of Australia’s big five banks by demanding that certain monetary policy actions be taken;

2) The Treasurer’s views are probably the least of the concerns of Australia’s big five. They are businesses answering to their customers and shareholders, not the fiefdoms of the Treasurer. here Any views that Treasurer Swan attempted to impose upon them would almost certainly be ignored;

3) It is almost a certainty that one of the big five will elect (if not immediately, than in the relatively short-term) to cut rates and seek to make their offerings more attractive to consumers. When this happens, there is a pretty good likelihood that the others will follow suit in due course.

This is not a good start from Bishop. One wonders whether the Turnbull Opposition is going to suffer for not having someone who can reliably score the odd point (e.g. the Opposition Leader!) against Swan opposing him in the Shadow Treasury.

4 thoughts on “More interest rates gubbish in the media

  1. Bishop’s a dud – she dug herself deeper and deeper in hole on the plagiarism sfuff. A really embarrassing performance in parliament. What was that ABC series with the dodgy councillors – she reminds me of the rich Liberal councillor. What was her name?

    And I’m not one to defend the banks, but I’d be more worried about the world’s banking and insurance sector falling off a cliff than any failure to pass on all of an interest rate cut.

  2. Yup – given what has been going on overseas, a bit of prudence within our financial system might go a long way.

  3. Hi Guy,

    Long time no see.

    The banking oligopoly is ripping everybody off and you are deluding yourself if you think there is any competition going to happen as per 3. Especially considering all the non bank lenders and smaller players can not get access to capital, so they are effectively not lending.

    One thing is certain, interest rates are definitely higher under Labour. Look at the margin over the cash rate for the standard viable.

    We are paying 8.56% or 2.56% over the cash rate of 6%. In August 06 when the cash rate was last at 6% we were paying 7.82% or a margin of only 1.82% (Less in May 07 and in Apr 97). This extra 0.74% margin seems excessive especially considering the banks source the majority of their mortgage funds from cheap deposits. The banks should of passed on the reduction in full. They have already increased their margin by 0.5% independently of RBA moves..

    If you cut and paste the linked table into excel and calc out the margins you will notice the margin was consistently below 2% during the Howard years and consistently well over 2% in the labour years.

    Kind regards,

    Tony G

  4. Tony, its fair to say that conditions in the current market environment are not exactly conducive to competition. With banks across the world being nationalised and the stock market having its worst week since 1987, it is not surprising that the major lenders are keeping their cards close to their chest. On the other hand, there is also some evidence of competition even now; RAMS has cut its rate by 0.9% (rather than the 0.8% cut offered by the Big 4) in response to the RBA’s 1% cut earlier this week.

    As for the Labor / Liberal thing, I think that is more a product of the economic situation the nation and the world finds itself in at any given time than anything party-political. You would be underanalysing the broader economic situation if you were implying that the political party in government dictates the differential between the cash rate and the standard variable rate. If the Howard Government won the election last year, I sincerely doubt that the cash rate / variable loan rate differential would be any different – particularly given that the tax packages taken by the Government and the Opposition to the last election were so similar.

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