Government and Reserve Bank Don’t Directly Control Interest Rates

ANZ Bank will soon disprove the myth perpetuated by many parts of the Australian media and backed by disingenuous statements from federal politicians that implies the Federal Government and Reserve Bank of Australia directly control interest rates charged on mortgages and other loans.

first home buyers photo credit: woodleywonderworks

EDITOR: This article was syndicated/re-published at the ABC Online – The Drum Unleashed under the title Busting Interest Rates Myths.

The current treasurer Wayne Swan has been accused by Business Spectator journalist Stephen Bartholomeusz of “in effect making a direct and misleading linkage between the cash rate and their [bank] funding costs”.

In reality the federal treasurer cannot force the banks to move interest rates. All the current treasurer Wayne Swan can do short of breaking up/strongly regulating the retail banking oligopoly is release stern statements like “the heat is on” and try to make it easier to switch a mortgage to a different bank.

A recent Essential Poll result for the question “which party would you trust most to control interest rates” predictably resulted in Liberal 42% vs Labor 24%.

In fact looking at the last 15 years of results of News Polls for the Australian newspaper, the perception of participants in each poll has been that the Liberal/National coalition was better at “handling interest rates” than the Labor party.

Despite the well-known claim by former Prime Minister Howard that “interest rates will always be lower under a Coalition government than under a Labor government” the reality according to economist and former Labor advisor Stephen Koukoulas is that “for only 5 months of the 11.5 years of the Howard govt was the cash rate this low (Dec ’01 to May ’02). For the other 11 yrs, it was higher” .

The Australian’s Peter Brent astutely points out that: “the consequences of good or bad policy generally take time to arrive, and in the short term external [eg: global economy] factors matter more”. For governments elected in the mid 1990’s “the economic circumstances were conducive to longevity” and “ low inflation, the lowest interest rates and unemployment”.

According to Koukoulas: “until now, banks have done a poor job highlighting how small a part the official rate is in their funding models. That’s about to change”.

By reviewing rates on the 2nd Friday of each month and breaking out of the tradition of changing mortgage and loan rates in lock step with changes in the RBA cash rate, ANZ Bank is attempting to reduce the howls of outrage directed at them as a member of the big 4 banking oligopoly when RBA cash rate reductions aren’t passed on swiftly or in full.

Alan Kohler, ABC News Finance commentator and Editor in Chief of Business Spectator said this was a “smart move” by ANZ to level with their customers.

Kohler had just suggested prior to the ANZ announcement that Australian banks should explain how their “funding costs work then when there’s a change in the price of the 26 per cent or so of funds that come from wholesale financial markets, change the interest rate on your loans then, rather than waiting for the first Tuesday of the month, when the RBA board meets”.

When making the announcement ANZ Australia chief executive Philip Chronican told the media that: “We just wanted to get out of this exercise where the RBA announces things and everybody expects us to move the next instance … the real world is not like that; we fund ourselves with various instruments, so the RBA cash rate is a pretty small part of the overall picture.”

Uncertainty over whether the European sovereign debt crisis will be resolved or drag on causing further chaos has resulted in vague hints from several banks including Commonwealth Bank, Bank of Queensland and ANZ that the cost of overseas funding may rise during 2012 and these costs would inevitably be passed on to borrowers.

No wonder the public is misled considering they are offered the usual flood of sound and fury articles on the issue every time there is a rate change eg Fears the big banks will try to set their own regime on interest rate reviews, ANZ to review interest rates every month, creating rift with RBA, and ANZ chief defends shift on rates.

The media would be well advised to consider the lead of Crikey’s Bernard Keane who looks at the bigger picture, pointing out that instead of political jawboning and media indignation it would be more useful to conduct a bi-partisan inquiry into the financial system and more appropriate regulation of Australian banks, which are currently a super profitable “protected species”.

Otherwise the uncompetitive status quo described in the report Competition within the Australian banking sector published on May 11th 2011 by the Senate Economics References Committee will remain, with “the four major banks now dominat[ing] the Australian banking market, accounting for around three-quarters of deposits and assets and a larger share of home loans”.


2 responses to “Government and Reserve Bank Don’t Directly Control Interest Rates”

  1. Interesting point of view! But I can’t say I agree with all that you’ve said there!

  2. I totally agree with you.

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