The Reserve Bank has had a major victory over the Australian banks with its rate cut announcement yesterday.
On two separate occasions since the last RBA board meeting on August 5, senior bank executives have said publicly that that they saw no reason why the banks couldn’t cut interest rates, if rates were cut by the central bank.
They placed the onus directly on the banks to cut, even though the likes of the Commonwealth and Westpac tried to avoid any committment.
Two of the most senior executives in the bank, including deputy governor, Ric Battellino, said that funding costs had been falling and the credit crunch pressures were being eased.
They made it clear there was ample room for the banks to cut.
Indeed Assistant Governor, Phil Lowe pointed out in a speech last month that"
"In the meantime, the extent to which banks are able to increase their borrowing rates is constrained both by competition amongst themselves, and the fact that higher margins make it more likely that lenders funding through the securitisation markets will again find it profitable to make housing loans. A widening of margins also risks raising the ire of the public."
Added to this was the pressures placed on the ANZ by the poor ending decisions involving Opes Prime and other margin brokers, and in the case of the NAB, the shock $1 billion in losses on write-downs on CDOs
The RBA’s comments (and no doubt it’s off the record chats with the banks) was an example of the power important regulators have to change the behaviour of those they regulate. No chance of the regulator being captured by the regulated.
It was direct, and at times pointed ‘jawboning’ and it eventually forced the two weakest of the big five, the NAB and the ANZ to publicly commit to following any RBA cut down.
The more profitable Commonwealth, Westpac and St George (which is now in a Westpac ‘sphere of influence’ pending their proposed merger) wouldn’t commit.
Well, yesterday afternoon, the haste of the big four was almost indecent.
The ANZ Bank almost pre-empted the Reserve Bank’s rate cut, so eager was it to get the news out that it was the first cab off the rate cutting ranks among the banks.
The RBA posted its decision and statement from Governor, Glenn Stevens at 2.30 pm on its website, there were stories on the wires a fraction after 2.30 pm announcing that the ANZ was first.
By 2.35 pm the NAB’s cut had been announced, with the seemingly recalcitrant CBA and Westpac splitting them.
The 33% owned CBA affiliate, Aussie Home Loans was there or thereabouts with its announcement and there was a steady stream of comments and cuts until well past 4 pm when ‘laggards’ like the Bendigo and Adelaide Banks (now merged) revealed their cuts.
St George waited until the big four had released their cuts and then revealed that it’s was 0.30%, or 0.005% more than the big four. But seeing it had lifted its rate by around 0.60% on top of the RBA’s rate rises, it had a bit more room to trim.
But St George nevertheless joined the rush and did what the RBA wanted them to do.
However the banks are still running a top up margin of 0.55% because of the impact of the credit crunch, although much of that increase has dissipated for our banks in the past month.
Getting rid of that premium and bringing variable mortgage rates more directly into line with the RBA’s cash rate will take longer and be a much tougher ask.
But don’t expect Aussie Loans to be too aggressive, it wouldn’t do to show up someone who has just paid a heap of money for that one third stake, while we should expects the reawakening Westpac subsidiary, Rams, to lead the way with some aggressive cuts either. We can’t have too much competition among the banks, can we?
But if the RBA thinks interest rates should be lower, it will cut them until the banks get the point.
They already understand that, but there will come a time when getting rid of the extra half a per cent or more, becomes a major issue.
So, instead of moaning about the RBA every now and then, or when rates rise, remember it’s our friend because it can make the banks cut rates.
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And in another area, the price of BHP Billiton will come under pressure after a delay in the consideration of its Rio Tinto bid by the European Commission.
The EC announced that it had stopped the clock on its timetable for a decision by November because the companies would not produce more information required to help assess the bid.
BHP Billiton shares fell 9% in New York (via the ADRs traded there).
The EC also wants information from Rio Tinto.
It didn’t disclose what the extra information was, and why it was needed.
The news will add to the downward pressure on the market today from the sharp slump in oil: down almost $US6 a barrel; gold, off $US24 an ounce, and copper, down 11 US cents a pound.
That was in the wake of Hurricance Gustav fading.
Our market is expected to open down around half a per cent: the BHP news will add to that negative feeling.
The European Commission says its timetable clock will remain halted until it receives and evaluates additional information.
The investigation had been scheduled to conclude Nov. 11. The commission will set a new deadline once it receives the additional information.
In Australia BHP closed at $US39.29 and RIO shares closed at $US119.97.
