Once again the silent millions have been ignored by silly media commentators rabbiting on about the way the Commonwealth Bank (CBA) didn’t pass on in full the Reserve Bank’s 0.25% rate cut last week to mortgagees, and instead cut mortgage by 0.13% and boosted some of its fixed deposit rates.
In their haste to condemn the CBA for earning a big profit, they again chose to focus on the quantum of the result and not what it means. And not the interest rate decision, which is no where near as bad as some of the real problems the CBA has caused for itself in the past few years with the Storm Financial debacle and weak to culpable advice to customers on retirement investors and life insurance.
The CBA has more than enough problems to confront (which it seems not to be doing with any alacrity) than a big profit and the interest rate pass through.
Now if it had been in the best interests of the CBA (and the other banks) to pass the rate cut on in full, they would.
But things are different with rates under 2% and approaching what economists call the zero lower bound, where interest rates start losing their potency to stimulate the economy for various reasons. At or close to the zero lower bound, monetary policy ceases to have as much impact than if rates were a few per cent higher.
And the lower the interest rate, the greater the discomfort for more and more people, especially bank shareholders and customers, outside a bunch of mortgagees.
RBA Governor Glenn Stevens alluded to the problem of less bang for every rate cut in his last public speech in Sydney yesterday:
"Certainly easy monetary policy can reduce the burden on debtors through the cash flow channel, at the expense of savers. This is probably still expansionary in net terms, though possibly less so than it used to be. But in the end, the most powerful domestic expansionary impetus that comes from low interest rates surely comes when someone, somewhere, has both the balance sheet capacity and the willingness to take on more debt and spend.
"The problem now is that there is a limit to how much we can expect to achieve by relying on already indebted entities taking on more debt. So for policymakers looking to use low interest rates to boost growth, the question is: which entities, if any, in the economy can accept higher leverage safely?” Mr Stevens said.
And the ignorant commentators at the ABC, Fairfax and other media outlets ignored that point yesterday and the fact that there are more people dependant on the health of the CBA (and other banks) than just mortgagees.
Mortgagees only cover around a third of all Australian households, investors in housing don’t need a rate cut because they depend on the negative gearing and capital gains tax concession to make their rewards (and a rate cut merely increases the amount we taxpayers have to pay to housing investors at some stage in the transaction).
And mortgagees are not spending their gains, they are saving them not reducing their repayments to match the lower rate, but leaving them at higher levels.
The Reserve Bank estimates there is more than $200 billion in repayments higher than needed from mortgagees – in other words the mortgagees have used the rate cuts to build up their repayment buffers and repay their loans faster than planned. They do not spend the savings, thereby boosting demand.
Mike Hirst, the CEO of Bendigo and Adelaide Bank made that very point on Monday when he said:
“Many of our mortgage customers are ahead in their loan repayments, while excess loan repayments continued to increase and mortgage offset accounts grew by 11 per cent over the year.”
That was ignored by the chattering classes in the media and commintariat, not to mention the ALP and other political critics of the banks.
Home owners who have no mortgages don’t benefit from the rate cuts and in fact face lower income from the fall in deposit rates in the past couple of years. That hurts people on fixed income from interest income from bank deposits and similar products based on the cash rate.
And then there are the millions of Australians indirectly or directly dependant on the billions of dollars flowing from the dividends (around $20 billion a tear) the banks payout to super funds and other investors, including self managed super funds whose holding of bank shares are their single largest investment.
The CBA”s CEO, Ian Narev pointed that out yesterday:
“We’ve got nearly two million Australian home loan customers, and we get it that they want to pay as little interest as they can on their home loans," he said. "But we’ve also got 11 million depositors, and we’ve also got 800,000 households who own our shares, and millions more who own them through the pension funds."
He highlighted the effect of record low interest rates on deposit customers over the age of 55, including retirees who depend on income from interest.
"Just like the home loan customers, these are Australians from all walks of life, this is not the elite of Australia. So we hear from our deposit customers, 75 per cent of whom are aged over 55, that the low interest rate environment has caused them real pain in their income, and is actually affecting their day-to-day decisions on what to spend.”
The CBA says its average small shareholder will receive $3,500 in dividends this year, after the bank kept its final dividend on hold at $2.22 a share, and $4.20 for the full year.
Mr Narev said the CBA’s dividends had also a “critical" bearing on some of these shareholders’ daily spending and how they felt about their financial security.
"So when we face these decisions, our job is to balance the interests of borrowers who would prefer to pay less with depositors who would prefer to earn more interest, with shareholders who are looking for some degree of stability on the dividend," he said.
“Our job is to continue to achieve that balance, sometimes we’re going to be unpopular by doing it, but the alternative is to have a weaker bank and a weaker economy." Many in the commintariat miss those points.
CBA shares eased 1.3% to $77.44 yesterday.
