Here's why the Australian economy would have been better off if banks passed on the full RBA rate cut

Photo: Ian Waldie/ Getty Images.

Many of Australia’s financial institutions withheld some of the recent RBA rate cut of 0.25% when deciding how much to pass on to home loan customers.

Major bank CEOs like the Commonwealth Bank’s Ian Narev justified the move as a balance between the interests of borrowers, shareholders, and depositors.

But as understandable as the lack of full pass through to borrowers is, given the variable rate structure of Australian banking (because average interest income from lending with the current rate structure in the Australian economy is collapsing faster than average interest expense paid), it seems while Ian Narev and the CEOs and boards of banks are serving the interests of shareholders and depositors, they may not be serving the best interests of the economy.

That’s the clear message from the Bank of England’s chief economist in an op-ed he wrote in the Times on Sunday over the weekend.

Titled “I sympathise with savers but jobs must come first”, Andrew Haldane sets out why savers must come second.

In doing so he also highlights why the BoE’s term funding scheme – which gives banks access to 100 billion pounds of funding near the cash rate so they could pass on the full 25 basis point cut from the Bank of England, is so important. That’s something the RBA might wish to think about for future rate cuts now that the cash rate is approaching the level where new RBA governor Phil Lowe said unconventional policies might be necessary in Australia.

But back to Haldane’s argument and why he, and the Bank of England are focused on jobs.

Haldane said:

In public policy, though, it is rarely possible to please everyone all the time. Understandably, some savers are feeling short-changed. Although I have enormous sympathy for their plight, the decision to ease monetary policy was, for me, not a difficult one. According to the Bank’s estimates, had policy been left unchanged, it was likely to have resulted in hundreds of thousands of people losing their jobs, many of them among the 10m people in the UK without any savings.

The loss of income and livelihood would, for them, be catastrophic. That is not a price, I suspect, many would be willing to pay.

But monetary policy is always about jobs, isn’t it? Always has been, always will be.

Central banks raise or lower interest rates in order to affect the cash rate and in so doing, also impact the term structure of interest rates within an economy. In doing that they are trying to influence saving or spending and also trying to either temper an expansion that has accelerated away from their comfort zone. Or, as is the more recent experience, try to get the economy moving again and have growth accelerate.

To put it bluntly, a central bank moving rates up or down is trying to impact activity so that at the margin it either costs workers jobs or helps them find work. In doing so, it affects the level of spending, demand, and velocity of money in an economy.

Remember former Australian prime minister Paul Keating’s comment, when he was treasurer, that the early 1990s downturn was the “recession we had to have”? That is exactly what he was talking about. Central bank policy aimed at engineering a slowdown.

Haldane highlighted that despite the UK’s “economic ‘recovery’, there are only two regions where GDP per head has returned to its pre-crisis peak — London and the southeast. In all other parts of the UK, GDP has not recovered.”

This economic disparity is then compounded by the impact that age and wealth have had since the depths of the GFC.

Again he says the largest gains by UK households since 2008 “have been in London (almost 50%) and the southeast (25%)”.

And the rich are getting richer, it seems.

“All of the large gains in recent years have been harvested by the asset-rich,” Haldane says.

“The wealth of the richest 20% of households has risen by nearly 20% since 2010. They have been the socio-economic speedboats.

“Meanwhile, the wealth of the poorest 20% of households has fallen by about 20% over the same period. They have been the socio-economic sunken ships.”

Britain is not Australia.

But you run his argument for Sydney and Melbourne property owners, superannuants, negative gearers, and older Australians.

Australian working families are suffering under the lowest wage increases on record, the need to borrow an ever increasing level of debt to pay for the home they want to buy.

It’s a combination which has driven Australian household debt to a new all time high.

As Haldane says of Britain:

The rapid emergence of Generation Rent is not, in itself, a bad thing. But an acute shortage of houses has caused property prices and rents to rise far faster than wages. This has eaten further into the disposable incomes of the young and the poor, who are typically renters: as a percentage of income, rents have doubled from 10% to 20% since the early 1980s. And it has kicked the housing ladder from under the feet of many would-be owner-occupiers, now priced out of the market.

Again, Britain is not Australia. But we could prosecute a similar argument in Australia.

Haldane says the UK is “an unbalanced economy experiencing an uneven recovery”. He is on the money. And his argument about jobs has particular poignancy for Australia.

The employment growth has been strong until recently but many of those jobs have been lower paid and increasingly the gap been unemployment and underemployment is widening.

That means while more Australians than ever before are working, an increasing number of them have expressed a desire for more work.

So like the UK, Australia needs more jobs if the current expansion is going to continue as key drivers like the construction sector’s positive influence start to wane.

We don’t just need more jobs. We need better jobs where people are feeling, or are actually, more fully utilised, if the recovery is going to become self-regenerating.

It’s a big ask. And as Haldane and Glenn Stevens both said in the past week, monetary policy cannot do it alone.

It would have been better for the economy for all of Australia’s financial institutions had passed on the full rate cut. But that’s in many ways incompatible with the health and vibrancy of the banking sector as a whole.

What Australia and the world needs now is properly targeted infrastructure to reinflate the economy and build the pathway to our economic future.

But as Stevens’ brutal assessment of how politicians are handling economic reform showed last week, we shouldn’t hold our breath on that front.

Greg McKenna has been working in banking and finance for 30 years. He has worked at Westpac and NAB, is a former Treasurer of Newcastle Permanent Building Society, and is currently director at Police Bank.

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