07/10/2010 - 00:00

Banking on the world’s top rate

07/10/2010 - 00:00

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The Reserve Bank has offered borrowers a small reprieve from higher interest rates but there are bigger issues to worry about.

THERE is a price that comes with Australia having one of the world’s strongest economies, and that is higher costs, including for money.

Specifically, Australia has the tightest monetary policy in the world, according to the economics team at CommSec, and that means interest rates are notably higher in this country than elsewhere.

That puts some perspective around this week’s decision by the Reserve Bank of Australia to leave the official cash rate on hold at 4.5 per cent.

A lot of the commentary noted that the cash rate has been on hold for five months, and the Reserve’s decision was contrary to market expectations of a 25 basis points rise.

There was less focus on the fact the Reserve lifted the cash rate by a quarter of a per cent in October, November and December 2009, and then in March, April and May 2010.

Explaining the latest decision, RBA governor Glenn Stevens said the current stance of monetary policy was delivering interest rates to borrowers close to their average of the past decade.

“The board regards this as appropriate for the time being,” he said in a statement.

Mr Stevens immediately added that further rises were likely.

“If economic conditions evolve as the board currently expects, it is likely that higher interest rates will be required, at some point, to ensure that inflation remains consistent with the medium-term target.”

There is an added reason for homebuyers and business borrowers to be wary.

The banking industry has been softening up borrowers for the prospect of interest rate increases, separate from any move by the Reserve on the official cash rate.

The Australian Bankers’ Association issued a statement this month stating that, “the cash rate was only one consideration in determining the cost of money lent by banks”.

It explained, correctly, that “30 cents in every dollar lent by Australia’s major banks has to be raised from overseas investors”.

In other words, the banks’ funding costs are determined to some degree by interest rates in international financial markets.

Competition for depositors’ money is another factor that feeds into the banks’ cost of funding.

For every customer getting a great rate on their term deposit or cash management account, there is a flow-through to funding costs.

The ABA went on to state that, “banks also have a responsibility to remain solid and healthy so that they can continue to raise money offshore from overseas investors to support the growing Australian economy by providing finance to businesses which keep people in jobs”.

At face value, it’s hard to argue with this statement; the strength of Australia’s banks played a major role in the country’s relatively smooth ride through the global financial crisis.

However, it also seems a bit rich for banks to turn up the rhetoric to the point where they are implicitly taking credit for business growth and jobs across the economy; especially at a time when many business operators are frustrated at the banks’ lending policies.

This frustration was borne out by industry consultant East & Partners’ latest survey of customer sentiment towards business banks.

East surveys 750 businesses every month, in order to measure business-banking sentiment on a scale of 10 to 100, where 10 is low and 100 is high.

In September 2008, customers gave their business banks a sentiment rating of 42.2 points.

Over the past two years, the index has trended down and is now at 33.8 points.

East said the sentiment rating had been significantly weighed down by companies in the micro and SME segments, which rated their banks less favourably than larger businesses.

To some degree, small business operators are always frustrated with their banks, but the trend in the East survey tells us that the banking industry is not winning the public relations war.

That will always be a battle when the major banks report record profits and pay their chief executives multi-million dollar packages.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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