The retail peak body wants rate cuts NOW! From BS:
Australia’s peak retail industry body says the retail sector is waiting for the big banks to cut interest rates, passing on additional cuts to reflect lower borrowing costs.
Director of the Australian Retailers Association, Russell Zimmerman, said the savings should be passed on before the Reserve Bank meets in February to make its first decision on interest rates for 2013.
And indeed borrowing costs are much lower, the lowest they’ve been since the European crisis began. As such, the banks have been busy issuing international bonds early in the new year. From Banking Day:
All four major banks, as well as Macquarie Bank, have been quick to get 2013 underway, with the equivalent of A$5 billion of bonds being issued within the first five business days of the year.
Westpac and Commonwealth Bank were the most prominent issuers, raising US$2.25 billion and US$2.0 billion, respectively.
But the CBA is out stirring the risk pot at the AFR, arguing that there’s still little certainty in funding costs and clearly not enough to cut rates:
Commonwealth Bank of Australia has warned market volatility in the United States may delay its ability to pass on lower interest rates to home loan customers despite the bank obtaining cheaper funds from international investors.
…“The markets have been so volatile for so long. It is always best in January because investors rule off their books at the end of the year and they come back and they are feeling a bit better about life, but then this can fade. So, I think it is too early to say there are any long-term trends here, particularly as we know all the long term problems in Europe still exist.”
“Post the fiscal resolution in the US, the [funding] markets have opened in a very positive way,” Ms Cobley said.
“The markets are often positive at the beginning of the year, but they are certainly positive now. The problem is that the US still has the debt ceiling to resolve in a couple of months’ time. It is likely that the market will become volatile in another six weeks or so, so it seems it makes sense to capitalise on the tone in the market as it is at the moment,” Ms Cobley said.
…“I think Europe will continue to bobble along for many, many years yet. We may see more issues coming out of Europe as the year goes on.”
I agree with Ms Cobley’s macro assessment and, for that matter, with the decision to not cut interest rates unilaterally. The banks wider spreads are the price we pay for expensive houses in the new normal. If you want lower costs then we’ll need to lower our risk profile.
But there is some hyperbowl here. Here is a one year chart of the banks CDS prices, which reflect underlying bond prices:
The little red circle is the fiscal cliff bump. Hardly a reason for concern before, during or after. But a longer term chart shows why I am not yet convinced the banks should be cutting rates:
In historical terms, CDS prices remain significantly elevated. On the positive side, it is obvious that prices are sitting at a very important level. Any significant break downwards from here would signify an end to the European crisis and its contagion effects on financial markets. One to watch.
However, even if we see the break lower I would not be holding my breath for unilateral bank rate cuts. Whoever moves first on that front will be breaking the cardinal rule of oligopoly business, never shift your prices ahead of your competitors. Moreover, they’ll cop a pounding from shareholders for setting the precedent that bank spreads can shrink not just expand.
It is unlikely to occur at all without significant, that is to say extreme, political pressure.
