ACCI makes basic mistakes on interest rates
Sydney, 15 February, 2013: The Australian Chamber of Commerce and Industry (ACCI) has demonstrated a very poor grasp of business economics and monetary policy with its calls today for banks to cut interest rates without waiting for the Reserve Bank.
The Australian Bankers’ Association (ABA) was responding to a media release1 from the ACCI Chief Executive Peter Anderson.
Steven Münchenberg, Chief Executive of the ABA, said: “ACCI’s call is based on both false claims and a profound lack of understanding of how monetary policy works. This is very disappointing.”
“Fortunately, the Reserve Bank of Australia (RBA) has made clear statements that counter ACCI’s assertions.”
ACCI has claimed that bank funding costs have come down. This is incorrect.
As recently as last week, the RBA made it clear in its Statement on Monetary Policy that: “Relative to the cash rate, banks’ outstanding funding costs are estimated to have been broadly unchanged over the past three months.”2 Prior to that, the RBA was confirming that bank funding costs were elevated and not all of those higher costs had been passed on to consumers.
“While we have seen some promising improvement in longer-term wholesale funding , as the RBA has specifically pointed out, that improvement in wholesale funding is having only ‘minimal effect’3 on banks’ overall funding costs. The RBA also made it clear that: ‘Competition for deposits remains strong….’4 and that while some deposits have fallen in line with the cash rate, others have not.”
ACCI has consistently argued that banks should not pass on their higher funding costs to their customers. The ABA would be interested to know whether ACCI maintains this principle for all businesses – that they should also absorb rather than pass on some of their higher input costs.
“ACCI has also shown a remarkable misunderstanding of how the RBA manages monetary policy. The RBA is concerned with the level of interest rates in the market, that is, how much households and businesses actually pay. The RBA uses the cash rate to influence those market rates and seeks to strike the right balance between economic growth and the containment of inflation,” Mr Münchenberg said.
“The RBA has stated that it’s broadly happy with where interest rates currently sit and if it had wanted to see lower retail rates, it would have cut the cash rate last week.”
“The flaw in ACCI’s call for interest rate cuts is that, even if banks cut rates, the RBA would merely move the cash rate up until retail interest rates were back to where they are today.’
“If banks cut 0.25% from rates today, as demanded by ACCI, the RBA would most likely increase the cash rate by that amount at its next Board meeting to drive rates back up. Businesses and households would end up paying no less. The RBA has made this clear when it said that if the banks had only followed the RBA changes, the cash rate today would be 150 basis points (1.5%) higher than it is.”
“Monetary policy and how it works is a fundamental aspect of a modern economy. It is surprising that an organization such as ACCI has such a poor grasp of how monetary policy works,” Mr Münchenberg concluded.
For further information:
Heather Wellard, ABA PR,
Phone: 02 8298 0411, Mobile: 0409 830 439 @austbankers
1. ACCI media release February 15: “National business push for 0.25% rate cut outside official cycle”
2. RBA Statement on Monetary Policy, February 2013, page 46. http://www.rba.gov.au/publications/smp/2013/feb/pdf/0213.pdf
3. RBA Statement on Monetary Policy, February 2013, page 46 http://www.rba.gov.au/publications/smp/2013/feb/pdf/0213.pdf
4. RBA Statement on Monetary Policy, February 2013, page 45 http://www.rba.gov.au/publications/smp/2013/feb/pdf/0213.pdf