Recently we highlighted that the time had come for Australia’s banks to cut rates independently of the Reserve Bank on the back of cheaper funding costs and a promise by Westpac chief executive Gail Kelly back in 2011.
This morning the AFR presented more evidence that the case was strengthening for such a move with news that the ANZ “raised $US2.25 billion ($2.4 billion) from US investors in New York on Monday night. The bank is paying 1.25 per cent for $US750,000 in three-year fixed notes, a margin of 40 basis points above benchmark three-year US government bonds.”
Now of course that money borrowed in the US in US dollars needs to be swapped back into Aussie dollars to cancel out the unwanted foreign exchange movement risk and leave the ANZ with just an Aussie dollar interest rate.
But the key here is that the margins the banks are now borrowing at compared to where they were borrowing during the GFC, when they added more than 100 basis points to RBA rates, are much lower than they were a year or two back.
The impact of lower margins being paid by the banks is higher margins being earned on loans advanced – whether mortgage lending or business lending.
This of course means that at a time of record profits, Australia’s major banks are becoming more profitable as their funding cost falls.
In the interest of fairness and returning some of the margin gained during the GFC when costs were extremely high for banks to lend to the Australian economy, it is now time for an out-of-cycle rate cut.
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