For the second consecutive year the big four banks, with the exception of ANZ, have come dangerously close to being seen as the Christmas Grinch. Sitting on their hands as the RBA dropped the cash rate by a further 25 basis points at their December meeting, all but the ANZ teetered dangerously on the brink of a swell in negative consumer sentiment.
Suggesting that the rising cost of funding prohibited them from passing on the two central bank rate cuts in full, the Commonwealth, NAB and Westpac tried to dig their heels in, but were forced to reconsider their position when the ANZ set a precedent, painting themselves as the finance sector’s very own St Nick.
Buckling under the pressure of public opinion and political scrutiny, all the banks were forced to follow the ANZ’s lead and come to the party on reducing their variable rates for customers in the lead up to Christmas.
But just as they started to look like the people’s champion, the ANZ announced they will no longer use the RBA’s official rate changes as a barometer to gauge whether their own retail mortgage rates should go up, down or remain unchanged.
Explaining the controversial decision, chief executive of ANZ’s Australian operations, Philip Chronican, said the public’s perception that banks should pass on Reserve Bank rate moves was “dysfunctional” given that other, more significant influences on bank costs had to be accounted for when assessing their own retail rates.
He described this expectation as a “nexus” that the ANZ has been planning to break for some time.
“There’s a fairly tenuous link between the Reserve Bank cash rate and the cost of funds of a variable rate mortgage, and yet we’re all stuck in the same routine of waiting for an RBA cash rate move before we move,” said Chronican.
Adding fuel to the cost of funding fire, chief executive of the Australian Bankers’ Association, Steven Munchenberg, has said there could come a time in 2012 when banks are forced to increase their rates in order to absorb the rising cost of funding due to Europe’s ongoing debt crisis.
“If the situation in Europe deteriorates, we may face a situation next year where the cost of funding is going up at the same time as the Reserve Bank is cutting rates,” he said.
In fact Munchenberg predicts that, in the foreseeable future, the banks will be forced to distance themselves from the RBA in terms of interest rate moves irrespective of public and political pressure.
The ANZ plans to review interest rates on the second Friday of each month (10 days after the RBA meets), at which point its 700,000 odd customers will be given good, bad or indifferent news according to whether the bank decides to cut rates, increase rates or keep them on hold.
Experts suggest other lenders will benefit from using the ANZ as a litmus test to see how this policy reform is received politically and publically, before deciding whether or not to lift their own interest rates independently of the RBA.
For the time being though, Westpac and the NAB are merely hinting at the possibility that a parting of the ways will occur down the track should the RBA continue to slash interest rates, even though offshore funding costs are likely to rise.
Both banks have come out with statements about “carefully balancing” the needs of customers and shareholders. As most of us are well aware however, it is the latter that generally take precedence when the banks are making policy decisions to do with their bottom line!
While cost of funding considerations may be the catalyst for the ANZ’s new, hardline tact with interest rates, I think this is more an attempt by the bank to position itself as a true independent entity and drill home to consumers that home loan interest rate movements will not always be in-line with the RBA.
But what does it all mean for borrowers?
Well, chances are all three banks will risk being called out for collusion and follow the ANZ in order to keep their bottom line healthy and shareholders happy, particularly if the ANZ manage to pull off a rate rise independent of the RBA.
Of course consumer backlash could have the opposite effect than the banks are hoping for, with lenders potentially being forced to compete harder to retain existing customers and attract new ones looking for a better interest rate deal. It will also give smaller lenders the competitive advantage they’ve been hoping for, with the chance to steal more of the market share away from the big four.
At the end of the day, regardless of whether the banks have a legitimate gripe with regard to public and political sentiment failing to acknowledge how much they have to fork out for offshore wholesale funds, it is virtually impossible to re-educate the masses overnight.
And let’s face it, the interest rate debate would be far less heated if the banks would come to the party and disclose their cost of funding, but of course; this information is ‘commercial-in-confidence’.
But it certainly doesn’t help to get consumers offside by swooping in and banging them overhead with a big interest rate stick. It will be interesting to watch this play out and see just how serious the ANZ is about its latest attempt to, once and for all, convince us that the cost of funding argument is a legitimate basis for increasing interest rates.
Will they be successful? I’m not so sure…
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