Thursday, 26 January 2012

February - Bash-A-Bank Month

Whatever the RBA does with the official cash rate after its 7 February Board meeting, February is shaping up to be "Bash-A-Bank" month.

The scenarios are simple.

If the RBA for some bizarre reason decides not to cut the cash rate, most of the banks will hike their variable mortgage interest rates by something like 10 to 15 basis points around the middle of the month.  Just think of the atmospherics when such a rise is announced.  Swan, Hockey and the drovers dog will line up to smash the banks for their "greedy rip-offs of hard working Australian home owners" or similar gumph.  It would, however, create a problem for the economy as it crimps cash flows at a time when the economy is soft and the labour market is weakening.  Paradoxically, it is actually why the RBA will not hold rates steady.

If the RBA cuts the cash rate by 25 basis points to 4.0%, it is likely that the banks will pass on 10 to 15 basis points for borrowers and pocket the other 10 to 15 for themselves.  The bank bashing would not be quite as acute (some has been passed on after all) but nonetheless, the bank PR people should be anticipating a flogging.  Economically, a split pass on the rate cut is probably what the RBA wants - a little relief for borrowers and a bit of costless support for the banks.

Of course, the RBA could cut 50 basis points, which strategically could be a good move.  It would go 50 if it has more significant concerns about the domestic growth and labour market outlook and worries about bank funding costs.  If the RBA goes 50, there is greater scope for the banks to pocket 20 or even 25 basis points and pass on 25 or 30.  Banks would be delighted with such a move.  Borrowers would also be happy.  That is arguably the best result for all - costless help for banks AND borrowers.  The criticisms of the banks in this instance would be less direct if the RBA were to articulate the background to its action.

Whatever the result, the groundwork is in place to hit the banks as the margin between the cash rate and mortgage rate (not net interest margin by the way) is set to rise.

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