1300 38 66 34
As the banks appear to detach from the RBA monetary policy, let's remind ourselves of the RBA intent.
Australian interest rates are set by the Reserve Bank of Australia, an independent body established in 1959. It is guided by an inflation targeting regime that seeks price stability in the 2-3% consumer price index band.
Despite the RBA decision to hold rates at 1.50% today (6/12/2106), many banks are increasing rates. With no clear uniformity, several revised their fixed rate terms upwards whilst others held fixed rates constant and modified their variable rates upwards. The only consistent modification across the board was the rate move is in an upward direction.
But despite the RBA keeping rates on hold the Banks of Australia story is largely one that appears disconnected from the realities facing the Australian economy. It’s dividing the opinions of many 'experts' as to the direction of the next rate move.
To quote Philip Lowe, Governor of the RBA - "...The global economy is continuing to grow, at a lower than average pace..."
As we see it, there are really three main drivers and levers of interest rates: Inflation, Unemployment and the Aussie dollar.
Inflation - Currently sits a full percentage point below the RBA’s target mid point. So logically there’s absolutely no case for raising rates here.
Employment - Natonwide employment data remains soft.
Exchange rate - Remains stubbornly high, despite US Dollar strength around the world.
So with inflation well below the target band, unemployment bubbling along rather than falling (outside of major cities employment is under enormous pressure), and the Aussie dollar stuck in the uncomfortable zone, it is very hard for me to see any case for raising rates in the foreseeable future.
But that would certainly not seem to be how the banks see it. Perhaps they're factoring some additional profits in advance of any uncertainty in the future, before Trump is empowered as President.
It's perhaps the banks being a little opportunistic. A move easily argued with the non-specific and 'broad brush' justifying comment of increases in Cost of Borrowing, but at this point little seems to really support that argument. Without substantial back up, it would seem a case of "ALL HAT AND NO CATTLE".