Ideas@TheCentre

  • Print
  • Email

Politicians no friends to home borrowers

Stephen Kirchner | 19 February 2010
Many analysts were surprised by the Reserve Bank’s decision to keep interest rates steady at its February Board meeting. In fact, the decision was well-flagged in a speech by RBA Deputy Governor Ric Battellino in December last year. The Deputy Governor noted that market-determined interest rates had increased by around one percentage point relative to the official cash rate over the last two years, reducing the need for increases in official interest rates. The RBA calibrates changes in official rates to changes in lending rates to achieve its desired level of credit restrictiveness. He also noted that ‘the margin on variable housing loans is much the same today as it was at the start of the crisis.’ The big increase in lending margins has been in relation to business lending, not mortgages.

This puts the bank-bashing of politicians and others into proper perspective. Politicians have been quick to condemn banks for movements in mortgage interest rates in excess of movements in the Reserve Bank’s official cash rate. Treasurer Wayne Swan continues to maintain that there is ‘no excuse’ for interest rate movements in excess of movements in the official rate. Yet, it is these very movements in bank lending rates that saved borrowers from an increase in official interest rates in February. Bank-bashing is just a political pantomime that has no relevance to the actual cost of borrowing to consumers.
At the same time that politicians have been bashing the banks, they have also been arguing for the tighter regulation of bank capital in international fora such as the G20. RBA Governor Glenn Stevens spelled out the implications of this in a speech last year: ‘on the assumption that most of these regulatory changes go ahead, one effect will presumably be to make the process of financial intermediation more costly.’ It is politicians who are most likely to drive future increases in the cost of borrowing, not the banks.

Dr Stephen Kirchner is a Research Fellow at the Centre for Independent Studies.