Something very important just happened. In truth, it isn’t new, but it’s been made official. The ANZ will now set its interest rates completely independently of the RBA. According to the SMH:
ANZ Bank has moved to avoid the “treadmill” that follows Reserve Bank rate changes by introducing a regular monthly announcement of its interest rates.
Along with announcing a 0.25 percentage point cut in its variable mortgage rate, ANZ said today the decision to switch pricing announcements to the second Friday of each month arose from the bank’s frustration about the public’s perception regarding mortgage rates and RBA rate moves.
“The official cash rate is interesting but not the most relevant factor in terms of our costs,” said ANZ group GM of communications Paul Edwards, who said its depends on domestic deposit costs and international funding costs.
“We thought this was an effective way to get off the treadmill of reacting to the Reserve Bank because it’s not relevant to our funding costs,” he said.“The perception that there’s a direct relationship between the official cash rate and bank funding costs has been a source of frustration internally.”
The RBA lost control of mortgage rates in 2008, when the spread between the official rate and mortgage rates began to blow out. So it isn’t new. But is it a good idea?
Well, for starters it’s true, so in that sense it’s no bad thing. The nexus between the official cash rate and mortgage rates is broken. And now we can see it. Maybe that will acquaint borrowers a little more with risk.
But from a stakeholder management perspective I wonder. Perhaps ANZ is calculating that the other banks will follow and, with five separate interest rate days each month, the public will switch off or get so confused that they might as well have. In the same vein, political pressure will not be able to be applied to the banks as a group around the RBA meeting pivot. In these respects, it’s a gamble that may pay off.
But they’ve also left themselves exposed. If other banks don’t follow, they’ll look like geese and a backlash is assured. And it’s possible that if the other banks follow, the cycle of political pressure will be endless, and result in legislation.
That, of course, will result from the primary problem: the public can no longer be confident that rate cuts will ever again pass unmolested through the banks hands. Not even in the US, where mortgage rates are fixed by markets, do the banks openly wield such power. The housing populists in Canberra will smell blood.
The RBA protects the banks. It gives them a veneer of authority behind which they can nudge their margins hither and thither. It may seem to be a fig leaf from time to time, but is it worse than swimming naked?
