The banks want an RBA rate cut too: Joye

Christopher Joye /

Last Tuesday I predicted ANZ would hike rates by between five basis points and 7.5 basis points, and noted that this could be a bit of a game-changer for the RBA’s May meeting.


On Friday the bank lifted them by six. While this is bad news for ANZ borrowers, it was a commercially astute decision for the bank and its shareholders for a variety of reasons.

First, Friday’s hike will improve the bank’s profit margins, which is important for banks in an environment in which revenues are growing slowly and the historical returns on shareholder equity will be difficult to maintain.

Second, it starkly reinforces ANZ’s (superficial) argument that there is a big conceptual disconnect between the lending rates banks set and the cash rate that the RBA targets.

As I have shown before, this is more fiction than fact and confuses changes in profit margins with the actual level of lending rates. To be sure, changes in funding costs will directly affect profit margins, unless product prices are varied accordingly. The question then turns to what “reasonable” and “competitive market” profit margins should look like. That is a debate I’ve tried to stimulate for years, but it remains largely unresolved.

In terms of the actual level of borrowing rates, the RBA is, on average, the ultimate arbiter of the price of money in the Australian economy.

The third factor that makes ANZ’s decision smart is that it amplifies the pressure on the RBA to cut rates in May. To be clear, a rate cut is by no means certain. If we get a high “core” or “underlying” quarterly inflation print on April 24 of 0.8% or more, and the historical inflation data does not revise down (or revises up), then the chances are that the RBA will leave rates unchanged.

Upping the ante on the RBA to drop rates further in May is important to the banks for two reasons. First, it gives them another bite at the profit expansion cherry: they can choose not to pass on the full 25-basis-point RBA cut and internalise this as margin.

In 2012 ANZ has taken back about 60% of the RBA’s second, December rate cut. But actual lending rates are still lower than they were at the end of November, and will be lower again should the RBA be convinced that it can justify pulling its trigger finger a third time.

A second reason why the banks want a rate cut in May is because, all things being equal, banks do better in lower interest rate environments. Credit growth and revenues accelerate, default rates and impairments typically decline, and asset prices and hence collateral values rise.

A final point to recognise is that wider bank margins will probably help encourage more competition in the long run. It will give nimbler players with lower cost bases (but higher absolute funding charges) a better chance of competing with the major bank oligopoly, which has numerous institutionalised advantages.

Christopher Joye is a leading financial economist and a director of Yellow Brick Road Funds Management and Rismark. The above article is not investment advice.

This article first appeared on Property Observer.


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