More grandstanding over the weekend on banks and home loans from Treasurer Wayne Swan and his leader, Prime Minister Julia Gillard, with a contribution or two thrown in from the increasingly irrelevant opposition Treasury spokesman, Joe Hockey. Senator Nick Xenophon weighed in this morning with more comments about making it easier for customers to leave their banks.

But all this talk ignores the fact that many bank customers are hooked into banks for savings products and at the moment are getting a “good deal” from their term deposits, which carry rates above where they should be, given the RBA’s rate cuts last November and December. That’s not me writing this, that’s the RBA’s belief expressed in its latest Statement of Monetary Policy on Friday.

Mortgage holders are not every Australian bank customer or in the scheme of things, all that important.

There are far more depositors, renters, millions of small business owners (who also have mortgages) and lots of fixed-interest retirees who depend on income from their fixed-term deposits and other savings products held with the banks.

In their myopia, Gillard, Swan, Hockey, and for that matter every politician, forgets the depositors and retirees and savers in favour of the mortgage holders, who number around a third or so of home owners. Many more home owners own their own homes outright and depend on savings (very important now that self-managed super funds are mostly a pile of losses from the enduring stockmarket slump).

The Commonwealth Bank will set off more bashing with its interim profit on Wednesday expected to be up 6% or so to around %3.5 billion. On Thursday and Friday we can expect more special interest pleading from Westpac and ANZ (the two “culprits” for the rate rises last Friday) when they update first quarter (December) trading results. The NAB released its update last week and it showed that profits continue to power along, but the going is getting tougher with revenue growth under pressure.

Friday’s first Statement of Monetary Policy from the RBA saw a brief discussion of bank funding costs, including the little discussed fact that rates on bank domestic deposits (more than 50% of their funding base now) have remained high relative to the two recent rate cuts:

“Banks have continued to compete actively for deposits in recent months. The average rate on major banks’ term deposit ‘specials’ has fallen by less than the cash rate, and the spread paid on term deposits has generally been above spreads on equivalent wholesale funding instruments. The average interest rate on the major banks’ at-call deposits (including online savings, bonus saver and cash management accounts) has fallen by around 50 basis points over the past quarter, in line with movements in the cash rate.”

Because domestic deposits are “gold” in that they tend to be a bit more stable and are more secure sources of funding, banks are having to keep deposit rates (even if they are one-off specials) higher to attract new home, and maintaining those higher rates for longer in new deals when term deposits expire. In other words, there is increased competition for domestic savings, meaning depositors are doing it better than they might have been a couple of years ago. This is a big positive as it helps the banks reduce their funding needs from volatile wholesale markets here and offshore.

That further cuts into bank profit margins by boosting funding costs, but it is rarely mentioned when banks moan about these rising costs. Usually it’s the cost of funding themselves from wholesale markets here and offshore that is blamed.

A rate cut last week from the RBA would have forced the banks to cut some of those deposit rates and risked seeing the start of a slow leakage of domestic deposits to competitors, or into property or the stockmarket in the next year, which would have increased their dependence on funding from the wholesale markets. As the RBA said on Friday:

“Bank funding costs have increased relative to the cash rate over the past six months. In particular, there have been increases in the spreads on term deposits due to competition for deposit funding, an increase in the spreads on wholesale funding due to an increase in the compensation required by investors globally for bank credit risk and an increase in the cost of foreign exchange hedging. “A more detailed discussion of developments in bank funding costs will be provided in the March Reserve Bank Bulletin.”

The banks have been warned, the RBA examination will not be the once over lightly that banking analysts and others provide the media and others. It will be far more definitive. An opening shot will come tomorrow when the RBA’s head of financial markets, Guy Debelle, speaks in Sydney on the topic of “Europe’s Effects on Australian Financial Markets”.

And for banks generally and those investors and others in business and politics looking for an improvement in the outlook for the sector this year, stop looking.Reading the RBA’s first Statement of Monetary Policy issued on Friday, there is no sign (at the moment) of the central bank being interested in cutting rates this year. (So long as Europe doesn’t implode. That remains problematic, even though the Greek Parliament this morning, our time, voted for the austerity cuts to set up the country receiving the €139 billion second bailout package. Given the extent of the riots and protests at the weekend, Greece is not out of the woods and the next elections could see dramatic changes in government and perhaps policy).

The RBA sees the economy growing around 3.5% out to 2014 (give or take half a per cent or so), sees inflation under control in the middle of its 2-3% target band over time and sees activity generally (consumption, investment, imports and jobs) following the pattern set last year. Therefore there’s no need to cut rates, unless Europe worsens and the bank again makes clear that Australia has ample room to handle that crisis should it arise.

In other words it’s more of the same, with one proviso: the central bank is very uncertain about the changing shape of the economy (which is only now starting register in the minds of those in the government and the media). It means budgets and spending in the public and private sectors will remain constrained for the next couple of years, if not longer, just as the banks face a similar outlook for revenue growth and lending. The RBA said:

“In terms of domestic factors, it remains difficult to judge the net impact on the economy of, on the one hand, a once-in-a-century investment boom in the resources sector and, on the other, a high real exchange rate. With the exchange rate having been at a high level for some time, a number of businesses are reassessing their business models and medium-term prospects. Other businesses are benefiting from the boom in the resources sector and from the lift in national income from the high terms of trade.

“Given the historically unusual nature of these events, there is, inevitably, considerable uncertainty about how these factors will ultimately play out, with plausible upside and downside scenarios for domestic growth.”

That remains the major policy question for Australia, not a few points on bank home loan rates (which doesn’t worry millions of mortgage holders who are paying off their home loans much faster than needed anyway) or the size of bank borrowing margins or the number of zeros after a bank net profit.

It will drive government spending and revenue, as well as private sector activity well into the life of the next government, surplus or no surplus.

Peter Fray

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