The Bull

Sunday 22

April, 2018 5:12 AM



TheBull PREMIUM

  • Property

Only the banks know how low rates can go

Only the banks know how low rates can go

By Expert Panel 08.08.2016


Richard Holden, UNSW Australia


The big, but completely unsurprising, news this week was the Reserve Bank of Australia cutting the cash rate to an historic low 1.50%.

As Vital Signs has been saying for some time, this month was a likely candidate for a cut, once second-quarter inflation was confirmed to be disturbingly low – as it was last week.

Australia is faced with extremely low inflation, low effective growth, a squishy labour market, and prudential regulation measures enacted last year partially reigning in the housing market. Given this, it was almost inevitable Glenn Stevens would engineer another cut.

But there were some other figures of note this week. Australian retail trade rose 0.1% in June, compared to market expectations of 0.3% – further underlining the weak domestic economy.

Adding to that story of gloom, private sector building approvals were down in June, both in absolute terms and relative to expectations. House approvals fell 2.3% implying a 5.9% drop compared to a year earlier. Apartment approvals fell 2.4%, implying a 4.8% drop year-on-year.

Chinese manufacturing data was mixed – or perhaps just confusing – with the official Purchasing Managers' Index (PMI) down to 49.9, from 50.0 the month before. Recall that 50 is the break even between expansion and contraction. Meanwhile, the private Caixin index came in at 50.6 in July, up from 48.6 in June. This was the first jump above 50 since February 2015.

Why the difference? The likely answer is that the official government PMI is more relevant for large, state-owned enterprises, while the Caixin index is a better gauge of smaller and medium-size companies.

In the US, payroll processing firm ADP’s latest data revealed a 179,000 increase in non-farm payrolls in July. This was essentially confirmation of the official Bureau of Labor Statistics figures (though on a slightly different scale) of strong job creation in the US. This is further evidence of the likelihood of a rise in official rates by the Fed in the next month or two.

Now, back to Australian interest rates. Lower rates only have a potential stimulatory effect if they are passed on to borrowers by (largely) the big 4 banks. About half of Tuesday’s cut was passed on – with the rest “kept” for bank shareholders.

  The Prime Minister and Treasurer want the major banks to explain the basis for their interest rate pricing decisions. Mick Tsikas/AAP

On Thursday afternoon, Prime Minister Malcolm Turnbull and Treasurer Scott Morrison announced at a press conference that the big 4 banks would have to front the House Economics Committee annually to “explain” their interest rate decisions.

Populist nonsense? Interventionist joke? Meaningless charade? Those are all phrases that come to mind. Turnbull grinned like a Cheshire cat as he described it as a “great opportunity” for the banks. Ho, ho, ho.

I’m no apologist for the banks, but they do have a legitimate argument that their funding costs have been rising. The US money market funds are much harder to tap as they have become significantly more conservative after the Primary Reserve Fund “broke the buck” during the financial crisis. Deposits now make up about 60% of bank funding, compared to 40% in 2007-08 – and those rates have been rising.

Nonetheless, the banks do have a good deal of market power. It’s legitimate for them to use that, unless they are violating competition law. That’s a matter for the Australian Competition and Consumer Commission, not the House Economics Committee.

One final note. To all those people who keep saying “rates have been cut a lot and it hasn’t done any good”: please search my name and the word “counterfactual”.

The Conversation

>> BACK TO THE NEWSLETTER: Click here to read other articles from this week's newsletter

This article was originally published on The Conversation.



FROM THE NEWSLETTER

Precarious employment is rising rapidly

It shows levels rising for both men and women... More

Investor Signposts: Week Beginning April 16 2018

CommSec Senior Economist Ryan Felsman takes a... More

Market wrap: popular stocks

Market wrap and popular stocks on Friday More

New Silver Bull Coming?

Silver has been dead money over the past year... More



WHAT’S ON THIS WEEK

week 27 April 2018
    • 23
    • 24
    • 25
    • 26
    • 27

TheBull.com.au

TheBull.com.au

TheBull PREMIUM article search



Markets
Index: Points Change Percent

Featured Comment

Treasury Wine Estate - soaring share price shows the rocket that Chinese consumption can put under earnings and market values.

Heady aroma of profits as vintners target Asian middle class

Broker buys

  • ASX Code
  • Company
  • Broker
  • FMGFortescueFairmont Equities
  • TLSTelstraFairmont Equities
  • IBNiBuyNew GroupRed Leaf Securities
  • MYQMyFiziqRed Leaf Securities
  • TCLTransurbanOrd Minnett
  • FMGFortescueOrd Minnett

Broker sells

  • ASX Code
  • Company
  • Broker
  • ORGOrigin EnergyFairmont Equities
  • BHPBHP BillitonFairmont Equities
  • FLTFlight CentreRed Leaf Securities
  • PLSPilbara MineralsRed Leaf Securities
  • QANQantasOrd Minnett
  • TAHTabcorpOrd Minnett

Central Banks Rates

  • RBA1.50%
  • FED0.50%
  • BOE0.25%
  • BOC0.50%
  • RBNZ2.00%
  • ECB0.00%
  • SNB-0.75%
  • BOJ-0.10%

Upcoming dividends

  • ASX Code
  • Company, Div., Franking
  • Ex-Div.

Eight brokers like these stocks

  • ASX Code
  • Company Name
  • Consensus Target

Upcoming Floats

  • ASX Code
  • Company Name
  • Float Date

PLEASE SUPPORT OUR SPONSORS, AUSTRALIA'S LEADING BROKERS:



© Copyright The Compare Group Pty Ltd. All rights reserved.