As I sometimes mention, the only area I really disagree with Donald Trump about is interest rates. Keeping rates high enough to sort out good investments from bad actually makes an economy more productive and growth oriented. The Fed is trying to harm the President but may actually be helping him create the economic boom the American economy is surely enjoying. It is possible for rates to be too high, of course, but it is also very possible for rates to be too low. No chance in the world central banks have the slightest understanding of any of this, or at least little chance given how they behave.
Let me give you a very clear example of pandering to economic ignorance:
The big four banks are reaping an extra $14bn a year in interest repayments after withholding a quarter of all Reserve Bank rate cuts since 2011 while at the same time reducing term deposit interest rates in excess of official cash rate reductions.
An analysis of standard variable rates for mortgages and interest rates paid to savers, carried out by comparison website RateCity on behalf of The Australian shows standard variable rates have fallen by just 2.99 per cent since October 2011. Over the same period, the RBA has reduced the cash rate by 4 per cent.
The big four banks’ margin on average standard variable home loans has grown to 4.05 per cent over the cash rate, wider than the 3 per cent difference when the RBA began its latest round of monetary easing in 2011.
The margin is now double the 2 per cent margin that existed before the global financial crisis.
And while I can see why the PM has these views, since he, too, must think the lower the rate of interest, the stronger the level of investment will be. But this is just wrong.
Scott Morrison rebuked the big banks last week over their failure to pass on in full the RBA’s October rate cut of 0.25 to a record-low 0.75 per cent. After the rate announcement, the CBA cut its owner-occupied rate by 0.13 per cent and ANZ by 0.14 per cent while NAB and Westpac cut by 0.15 per cent.
“Mortgage holders … have a reason to be disappointed in the banks, basically, profiteering,” the Prime Minister said.
He was only “disappointed” from which I assume he does not intend to wield any big stick at the banks. Hope so. Labor of course understands none of it:
Opposition Treasury spokesman Jim Chalmers said on Sunday Labor would consider, as part of a broader raft of potential packages, whether to increase the 0.06 per cent tax on the big four banks, plus Macquarie, to increase competition in the sector….
“All of these options should be on the table,” Dr Chalmers told Sky News.
Higher taxes to increase competition! What economic buffoons these people are.