Mike Andrew Consulting

Odds are interest rates will rise on Cup day

By mike, Oct 28 in blog with 0 comments

Don’t for a second believe that the Reserve Bank automatically will keep interest rates on hold next Tuesday. Trigger-happy screen jockeys yesterday may have raced to their terminals to sell the dollar and push money markets around after the release of lower-than-expected inflation figures.

Unfortunately, they overlooked one crucial element. Those figures released by the Australian Bureau of Statistics yesterday were a gauge of what has taken place in the past.

That immediate past – the three months to the end of September – gave the illusion of a slightly more benign inflation environment than some expected, but that’s not necessarily a portend of what is to come.

The debate that will take place around the Reserve Bank board table on Tuesday will be about what is likely to happen in the future. And there are a couple of inescapable conclusions on that front: our economy will gather speed and inflation pressures will mount.

You know that old saying about lies and statistics. Well, if you take the effort to dig beneath the surface, those headline figures that grabbed the attention of the money market, you’ll notice a couple of fairly obvious trends that tend to buck the argument that rates will be kept steady on Melbourne Cup day.

The headline inflation figure, and for that matter the core inflation numbers, certainly are being kept in check by the stronger dollar, on the amount we are paying for imports. That’s exactly what a stronger dollar is supposed to do, act as a brake on growth and inflation.

But on the domestic front, strains are beginning to appear.

With employment running close to capacity (you never get absolutely full employment) and with an investment boom in resources, domestic prices have begun to gather speed. Plus there are continued concerns about the housing market, where prices still seem to be on the trot, even if they have slowed from the gallop earlier this year.

Then, of course, there is the political situation within the Reserve Bank boardroom. As in any field of human endeavour, not everyone agrees on everything, and thanks to greater disclosure from our central bank these days, we’ve managed to get a clearer picture on the thought processes within the inner sanctum.

This month’s decision to keep rates on hold came as a shock to the screen jockeys, who almost unanimously predicted rates would rise. They did this because the Reserve’s governor, Glenn Stevens, gave a speech in Shepparton where he indicated that in the medium to longer term the resources boom would put pressure on interest rates.

It was a knife-edge decision this month. But there were some notable absentees, particularly the academic Warwick McKibbin, who has made no bones about the fact that he reckons interest rates should rise.

Couple that with the fact that the statement released by the Reserve after that meeting included some fairly strong words, essentially indicating that rate rises were inevitable. It was a question of when rather than if.

There are four people in particular who are praying the Reserve lifts rates on Tuesday. One is the National Australia Bank chief, Cameron Clyne, who yesterday indicated that the big banks had a public relations problem.

He got that right. For again, buried within the NAB’s fabulous 63 per cent profit leap (19 per cent on a cash earnings basis), was the revelation that interest margins – the gap between borrowing costs and lending prices – had widened.

That gap – the profit margin – widened significantly in the first half but was wound back a little in the second half.

Any rational person looking at the result – the headline figure, the cash figure and the margin spread – would have difficulty reaching a conclusion other than our banks are raking it in right now.

But still, they persist with the argument that they will have to push their rates higher, above any official rise, because their costs are rising.

If you think about it, the only kind of business that can put forward that argument and maintain a straight face is a monopoly – or, in the case of our banks, an oligopoly.

There exists an attitude among monopoly operators, and it is an attitude characterised by arrogance. The thinking is: ”Consumers will pay whatever we charge, because they have to. And we will charge whatever our costs are, plus a hefty margin.”

Truly competitive firms cannot operate in that manner. It is true that they have to charge more than their costs or they will go out of business. But the price they can charge is determined by consumer demand and the supply they can deliver.

It is for that reason the competition regulator – which gave the green light to a massive reduction in competition during the worst of the financial crisis – is looking at whether the big four banks are indulging in a spot of price collusion with their constant warnings that interest rates must rise because costs have risen.

That’s not the only fight they have on their hands. There is a serious conflict brewing between our central bank, which is trying to run the economy, and the commercial banks, which are trying to maximise profits.

The Reserve Bank clearly wants to restrict the growth of credit – to slow the economy and a potential housing bubble – and to do so by maintaining control over interest rates. The big four banks, on the other hand, would love to see an explosion in credit growth – they are in the business of lending money – and fatten their margins along the way.

By tacking on a little extra to official rate rises, the commercial banks are undermining the authority of the Reserve Bank and restricting its ability to manage monetary policy.

Now they have been exposed, the Reserve Bank may just make a move on Tuesday.

Story by Ian Verrender www.smh.com.au

About the author

Mike Andrew has been working with the Internet and small business for over 12 years. Mike has been a keynote speaker at conventions and seminars and conducted social media training sessions all over the world. Mike has an extensive media background having worked in electronic media for over 30 years. Mike specialises in social media and Internet marketing strategy, SEO techniques and search engine marketing campaigns. His articles appear on numerous blogs around the web as well as national magazines.