AFR rate cuts whaaambulance reaches intensive care unit

Chanticleer is at it again today:

At the end of a huge week for the big four banks, it’s time for those reliant on dividend income to think hard about the longer-term implications of official interest rates being lower for longer.

There is no need to panic. But as official rates set by the Reserve Bank of Australia move to 1 per cent and possibly 0.75 per cent over the next six months, there will be enormous downward pressure on bank profitability.

Good. The fall in bank ROEs is unavoidable. If you don’t cut interest rates then house prices will keep falling as unemployment rises and profits gets hammered. It will be made worse by a skyrocketing Australian dollar. This will happen irrespective of APRA cuts and fiscal prompts. A falling cash rate is the key signal for demand stimulus and can’t be substituted.

Before long the mark down in collateral values with lift LVRs and the bank’s will be forced to crimp lending or raise capital, or both, thanks to their pro-cyclical risk weightings.

In a banking policy sense, one possible way out for the banks is for the RBA to move immediately to a mix of QE and helicopter money such that non-deposit bank liabilities can be made cheaper and mortgage rates be cut while the economy gets a lift from much higher government spending and a lower AUD.

But even that faces the communications challenge of getting households to borrow more without the monthly drama of rate cuts to trigger interest in property. And, indeed, you don’t want or need them too anyway given the entire strategy is to help them deleverage.

Whichever way you cut it, it’s a new and more hostile world order for banks.

Chris Joye also adds some nice texture to the AFR’s bank whaaambulance:

Treasurer Josh Frydenberg (“J-Fry” to his mates) personally met three of the major bank bosses, and called the chairman of the fourth, before the RBA’s board meeting to ram home the message that he and Prime Minister Scott Morrison expected lending rates to drop by a full 25 basis points. And that was not negotiable for these explicitly and implicitly government-guaranteed beasts.

…On the day he cut the official cash rate to a new record low of 1.25 per cent, RBA governor Phil Lowe likewise took the highly unusual step of vocally demanding full pass through, underscoring the fact that “ScoJo” were not engaging in mere political posturing a la their predecessors. This was the real deal.

Meh. Stop the whining. If we’re going to run an overextended banking system utilising market funding to cover deposit shortfalls then we can expect bond holders to have a say. Said bond holders will be reassured that the bank’s still have enough market and political pricing power to not pass on the cuts in full. As well, if we’re also going to implicitly guarantee said bonds then we’d be an idiot to expect anything else. What you’ve created is an entirely predictable moral hazard monster specifically designed to exploit yourself, not some equitable handshake agreement over tea and cookies.

Even Mr Joye contradicts himself later in the piece:

It makes no sense for the RBA to crush the banks’ net interest margins through rate cuts and expect them to comfortably lower lending rates.

Limited pass through means the RBA is going to be inevitably forced to think about a third cut. This is why the central bank will presumably be considering some form of complementary quantitative easing (QE) to maximise pass through, ideally before the next cut.

Well exactly. The ScoMo Government wants higher house prices and full bank pass through but it can’t have both when borrowers are so overextended and interest rates already so low.

As in all things these days, the outrage at bank gouging is all virtue signalling.

David Llewellyn-Smith
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