Hedge Clippings | Friday 03 May, 2019

This week saw the ongoing debate continuing between various economists over the likelihood of the RBA delivering a rate cut following their meeting next Tuesday, with about 50% of them thinking they will (or should) and the other 50% thinking they won't (or shouldn't). Those in the first group (the "will'ers" or the "should'ers") including Shayne Elliott, ANZ's head teller, want the RBA to cut rates to save the property market (which it won't - or shouldn't) even though it was only 12 to 18 months ago that the RBA was concerned about the property bubble!

What was interesting was that Elliott's opposite number at NAB was in the opposite camp, espousing the view that at these ultra-low levels a rate cut of .25%, plus another one later in the year of a further .25%, will not only not help to resurrect the property market, but is also unlikely to reverse the low inflation levels which triggered the whole debate in the first place.

To be fair, Elliott's concerns were also directed at APRA's responsible lending guidelines which require the banks to ensure a borrower's actual rate, say around 4.25% to 4.75%, has a sufficient buffer between 4.25% and 7.25% - the rate the regulator considers prudent for future serviceability. The ANZ bank can carry on about "Responsible Lending" and APRA's margin of error, but until they were outed by the Hayne Royal Commission, all the big four were more interested in lending volumes, not lending responsibility.

And if ANZ really think 0.25% off the current 1.5% is going to help the property market, that assumes they're committed to passing any cut on to borrowers in FULL? Pigs might fly! Canstar produced figures showing that, assuming only half of a .25% cut is passed on by the banks, the monthly saving would be just $26 on the average mortgage of $400,000.

And if the ANZ (and others) were really committed to lower rates, or passing them on, why haven't they dropped credit card interest rates one iota since cash rates were 5 or 6% higher than they are now?

For the record, credit card rates are still in the 18 to 22% band for most bank customers. ANZ currently offer (or promote) 0% for 15 months on balance transfers, and once you're up to your eyeballs in debt the rate reverts to a somewhat less generous 21.47%. (oh! And with a $58 annual account fee).

And lowering interest rates to push inflation up? Monetary policy used to be used to stimulate or dampen demand in the economy, which right now is traveling ok, even if it's not going gangbusters (depending on which politician you listen to). And if you want to see how much low interest rates have done to stimulate economic activity elsewhere, take a look at Japan or Europe, where negative rates have had little to no effect on growth, consumer demand, or inflation.

The RBA's inflation target of 2-3% was set at a time when no one in their right minds considered the lower level would be breached, let alone halved. Those wanting to see rates fall further also seem to ignore the effect it will have on deposit rates - already pitifully low, but at least supporting equity prices thanks to dividends, including, for some, franking credits - for the time being.