The ANZ January interest rate review (http://ow.ly/d/sLF) left variable interest rates for mortgages and small businesses unchanged. Strategically this was no surprise, but the ANZ is doing a good job at starting to articulate the breaking of the link between official interest rates set but the RBA, its funding costs and therefore the interest rates is changes retail borrowers.
There was a clue in the statement that funding pressures will cause the ANZ to either hike retail rates in the months ahead or more likely, not pass on in full any future cuts in interest rates delivered by the RBA.
ANZ CEO Philip Chronican noted:
- "we wanted to be clear that these higher interest rates we are now paying our depositors and the elevated prices we are required to pay for wholesale funds are going to be sustained".
In other words, the gap between official interest rates and retail rates will continue to widen.
There are some implications for markets from this - for the RBA to achieve its monetary policy objectives by targeting retail borrowers, official rates will be lower than they would otherwise be. As a result, market pricing for future interest rate moves should be heavily biased to lots of cuts. 3.5% still looks a reasonable target for the cash rate mid year, with the risks to the downside as inflation falls. Or it could be that the bottom of the interest rate cycle will be pushed out to the second half of 2012 or even 2013.
This may well help undermine the Australian dollar which remains overvalued on most measures.