The Reserve Bank of Australia last week surprised just about everyone with its assessment of the economy, cutting the cash rate by 50 basis points to 3.75 per cent. It was a surprise because certain parts of the economy, such as retailers, had been pleading for cuts for some time but until last week the RBA had remained relatively immune to their demands and more concerned with its prime goal of keeping inflation in the 2-3 per cent range as other parts of the economy – such as mining – roar ahead.
At this month’s RBA meeting, however, governor Glenn Stevens pointed to moderating inflation concerns and a weaker economic performance, both here and abroad, as reasons for the cut. In particular, he pointed out that the continuing strength of the currency was affecting growth, knowing that high interest rates exacerbate the strength of the dollar as overseas investors seek to exploit the difference between lower rates in Europe and the US and higher rates here.
For domestic borrowers, both residential and business, the decision is only half of the story. Previously banks had moved rates out of cycle with the Reserve Bank but that now appears to becoming the rule rather than the exception.
If out-of-cycle rate rises continue, there are two things banks need to provide their customers – one is certainty and the other is clarity.
With bank interest rates now being announced over what is nearly a two-week period (from the RBA’s first Tuesday in the month to ANZ’s second Friday in the month), the period of uncertainty over rates is elongated, speculation in the media is feverish and borrowers are constantly on tenterhooks. The interest rate speculation circus has spun out of control and BRW would prefer to see an agreed date for interest rates moves to minimise the uncertainty.
The other point relates to clarity.
Much as businesses and homeowners dislike higher rates, no-one can dispute the banks’ right to operate as a business and deliver the returns promised to their shareholders. Funding has become more expensive, there is no argument on that. ANZ was able to amply demonstrate this in its half-year results where although it had a headline record profit figure of $2.97 billion, its Australian business suffered a 7 per cent drop in profit.
However, banks are pretty feeble at getting this point across. When the RBA raises or drops the cash rate, everyone can get a cogent explanation of the board’s thinking through its website and its deliberations are helpfully explained in full by most of the media. This openness gives us as much clarity as possible about how the RBA board feels about the economy and allows individuals to make informed decisions.
If the banks are going to raise rates independently of the RBA, they need to lift their game in providing clarity to their customers about their own funding needs. A few paragraphs of a press release assuring customers that they are focused on balancing the needs of borrowers and deposit holders is no longer enough.
Certainty is what allows business to flourish and take the long-term decisions that creates sustainable growth. Until they do, it’s too easy to give them a bashing.