EDITORIAL WEDNESDAY 16.12.09.
After Three successive interest rate rises over the past three months, the widely held expectation has been for more of the same in the New Year. So far many of the economic indicators have been stronger than expected, leading to the conclusion that the recovery from the Global Financial Crisis is well underway and powering along. Unemployment appears to have peaked and is falling, consumer and business confidence are rising, and home loan approvals are increasing. But two things have emerged to suggest that interest rates might pause at current levels before any further increases.
One is the latest economic growth figures showing lower than expected growth for the September quarter at 0.2%, about half of what was forecast, and well down on the 0.6% in the previous quarter. With no risk that the economy might be in any way overheating, the pressure for interest rates to rise is significantly eased. In fact, the feeble growth figures should be seen as a reminder of just how fragile the recovery really is.
The other factor is a speech given by Reserve Bank Deputy Governor Ric Battellino which has provided some clues as to the future direction of Reserve Bank policy. While recognizing that the cost of borrowing has risen for banks, Mr. Battellino has shown that the margin between what banks pay for funds and what they charge their customers is now wider than it was before the Global Financial Crisis. Closer examination shows that the greatest margin increase is not in mortgage lending, but in business lending, further undermining the strength of economic recovery.
Mr. Battellino also explained that this increased margin represents a shift in what might be considered a normal setting for official cash interest rates. As the differential between bank lending rates and the Reserve Bank cash rate is now about 1% greater than it was, the effect of the current official rate at 3.75% is similar to the effect that 4.75% would have had before the increased margins came into play. In other words, he is saying that the Reserve Bank won’t have to increase official rates by as much because the banks have already increased their rates independently.
What this means is that the current official rate is now, in Mr. Battellino’s words, “back in the normal range”, even though it is still below historical norms. On that basis, there is no rush for the Reserve Bank to push rates up again when they meet again in February. It also means that not only are banks actually making more profit out of their loans now than they were before the Crisis, but most importantly they have no excuse to pass on any more increases above the rate set down by the Reserve. If they do it will only prove that they really are being greedy and profiteering at our expense.