News Limited’s mainly tabloid columnist Terry McCrann got it mostly right with his call on Friday: while the Reserve Bank of Australia did not yesterday announce a reduction in the cash rate target, the language of the statement published makes it plain that a rate cut is likely in a month.
So have banks digested the second element of the Friday Herald Sun splash (and in which it seems likely that McCrann was channelling not only RBA governor Glenn Stevens in the newspaper, but Treasurer Wayne Swan as well)?
That is, that banks in Australia had jolly well better cut lending rates (and in particular home loan interest rates) in tandem with the RBA cuts to cash rates.
The lessons from New Zealand are that banks show no such inclination at the moment to lower rates following a cut in official rates.
Two weeks ago the Reserve Bank of New Zealand cut its target for the cash rate to 8.0% from 8.25%.
And two weeks later, not one bank, nor any lender this newsletter is aware of, has cut any variable rate on any lending product, business or consumer.
Banks have cut some fixed-rate mortgage products over the last two weeks, but banks were doing so already, given the steady fall in the level of two-year and longer swap rates in the bond market since their brief spike two months ago. (This did not stop some bankers asserting a link between the cash rate and fixed-rate mortgages in media commentary).
Nor have banks dropped interest rates on deposits or other liabilities by much (even though the competition for deposits from finance companies has evaporated over recent months given the crisis of confidence in that sector).
The RBNZ probably had no illusions over the likelihood that banks would lower rates charged to customers.
Indeed, one stated rationale for the recent cut in cash rates was to “help mitigate the effect of these increases [in banks’ cost of funds] on the actual borrowing costs paid by firms and households.”
So to that extent the RBNZ may simply have been aiming to maintain an equally restrictive stance, but simply one that took into account a secular change in the premium banks pay to raise liabilities.
A couple of bank commentators provide a flavour of the thinking. (The employers of both would say that their chief economists are simply commentators; and so do not reflect the views of management.)
Tony Alexander, chief economist of Bank of New Zealand, wrote in his weekly commentary last week that “running on the assumption that the effects of this crisis will only slowly disappear over the next two years, for every 0.5 per cent cut in the RBNZ’s official cash rate there might be less than half that of actual reductions in customer interest rates over the coming 12 months.”
Saul Eslake, chief economist of ANZ, made a similar point writing in Crikey yesterday, and drew comparison with Britain where cash rates have fallen (by 75 basis points) and mortgages rates have actually gone up.
So there’s plenty of politics and reputation issues for banks to manage over the next few weeks.