Why the RBA deserves to cop some heat over the banks’ big rate rises: Bartholomeusz

The Reserve Bank’s minutes of its Cup Day board meeting have confirmed what any reasonably intelligent observer of the bank – which means few of those politicians currently railing against bank profits – would already have concluded. The RBA expected the major banks to respond to its increase in the cash rate in exactly the fashion that they did and factored that into its decision to increase official rates.

The minutes state that the board members noted that lending rates might increase by more than the cash rate but this tendency would not be lessened by delaying a change in the cash rate.

“Lending rates had been rising relative to the cash rate since the global financial crisis and the board had taken this into account in setting the cash rate. It would continue to take account of any changes in margins in its decisions in the period ahead.”

The fact that the RBA did raise the cash rate by 25 basis points knowing that the majors would raise by more than that says that it was comfortable with the prospect of the extra 15 to 20 basis point increases imposed by the banks. Anyone who follows the RBA knows that while its policy tool is the cash rate it actually targets the banks’ lending rates, which are the rates that actually impact economic activity.

Now it is saying for the public record that not only did it take into account at this month’s meeting the likelihood that the banks would raise mortgage rates by more than its own increase but that it had previously done so. In other words, the outcome created by the banks’ response to the RBA move is in line with its intended monetary policy.

In reality, the big banks’ actions probably only mean that if there were likely to be four increases in official rates next year there may now only be three.

In any event, instead of lambasting the banks and threatening them with re-regulation, the politicians angry about the rate rises ought to be criticising and threatening the RBA – except they won’t because it isn’t as soft or as politically advantageous a target.

The RBA isn’t an ivory tower institution. It does have deep connections into the financial system and formal and informal relationships with the banks. It is also full of some very sophisticated people.

When it held off on increasing rates in October there were suggestions RBA staff had contacted the majors and sounded them out about their intentions and decided not to raise official rates at the time because of the expectation that the majors would add a premium to any official increase.

This month there would have been even less uncertainty about what the majors would do in response to an RBA increase – the banks had spoken publicly and very directly about the pressure on their net interest margins created by continuing increases in their average funding costs and the imminent need for them to do something to relieve it.

Those pressures will continue well into next year before the bulk of the cheap pre-crisis funding has matured and been re-financed. The RBA minutes make it clear that the central bank understands that and will take it into account in future decision-making.

This article first appeared on Business Spectator.