As the Reserve Bank of Australia (RBA) gears up for its forthcoming decision on interest rates this 1 August, the banking narrative in the country appears to be thickening. The nation’s leading banks, popularly known as the “Big Four”, have pivoted their strategies in recent months towards protecting their profits and dividends. Although this shift may disconcert borrowers, it seems to be invigorating the banks’ profitability, marking a rare balancing act in the finance world.
The Big Four, namely the Commonwealth Bank of Australia (CBA), ANZ, NAB, and Westpac, have incrementally increased new customer home loan interest rates, thereby surpassing the RBA’s official cash rate rises. This significant pivot from aggressive mortgage discounting to prioritising margin management indicates a vital turning point in Australia’s banking sector.
Starting from the beginning of the year, these banks, with a hefty 0.32 percentage point increase above the RBA’s rate rises, have redefined the norms for basic home loan products. The CBA has led this charge with the most considerable out-of-cycle rate increases for new customers this year, moving away from last year’s ‘loan-book growth at all costs’ strategy to safeguard profits amid a challenging market.
As expected, the burden of this transition is falling on the mortgage holders. Borrowers with a loan of $1 million are now facing an additional annual expense of $29,200. This reality has unfolded since the central bank began raising rates in May of the previous year. Yet, for anxious bank investors, these higher rates are a glimmer of hope amid dwindling profitability.
In the meantime, the phasing out of cashback offers by most major banks suggests a lessening competitive intensity. This trend has provided some relief for the RBA, despite the banks increasing rates for new borrowers on an average of 4.5 times over the past five months, as compared to the RBA’s three cash rate rises during the same period.
Evidence for this trend comes in the form of recent rate increases for new customers, with ANZ, for instance, raising its basic variable home loan rate by up to 0.15 percentage points. Other major banks have followed suit, with 1.25 percentage points rises in NAB’s Base Variable rate, ANZ’s Simplicity Plus product, and Westpac’s Flexi First Option.
However, as these banks veer away from their dominant discounting practices for new customers, all eyes are fixed on the RBA’s forthcoming decision on interest rates. The pertinent question is, will the RBA risk pushing the economy into recession with further rate rises?
The dread of a recession, marked by job losses, bleak employment opportunities for those fresh out of education, and the potential collapse of businesses, is a familiar fear. Esteemed economists like Alex Joiner, Chief Economist at IFM Investors, and Stephen Koukoulas, Adviser to the Prime Minister of Australia, have raised concerns about the Reserve’s recent monetary policy, suggesting that the RBA might have already been too aggressive with its rate rises.
Recent macroeconomic figures reinforce these concerns, with the inflation rate noticeably decelerating from 7.8% to 6% YoY in the June quarter. Furthermore, a closer look at the most recent inflation data—a 0.8% increase in the June quarter—projected annually, suggests a potential dip in the inflation rate to around 3.3%.
Backing this cautionary stance is the principle of “lags” in central banking, which suggests that the full economic impact of interest rate adjustments can take about a year to completely materialise. A clear slowdown in economic activity since the March quarter, featuring a mere 0.2% growth in GDP and consumer spending, alongside a slowdown in employment growth despite a 3.5% unemployment rate and an increase of 32,600 in employment in June, further fortifies these concerns.
Alex Joiner’s recent comments underscore this uncertainty, stating, “The inflation gauge for July rebounding in monthly terms after a soft June. Not a precipitous disinflationary trend just yet.” He also noted a marginal increase in house prices across major cities in July.
On the other hand, Stephen Koukoulas paints a bleak picture of the retail sector, commenting, “Another miserable retail trade result—the consumer recession looks like heading for a third straight quarter. Ouch!” Coupled with the June inflation data, any consideration of a rate rise by the RBA next week seems absurd.
Other crucial factors likely to sway the RBA’s decision include fiscal policy, including a strong federal budget surplus of at least $20 billion. Another concern is the ongoing lag in wage growth relative to price increases over the past decade, which has been eroding household incomes and spending. Further interest rate rises could intensify this issue.
As the nation anticipates the RBA’s decision tomorrow, it’s clear that Australia’s banking sector is experiencing a significant shift. The RBA’s challenges and choices will profoundly shape the economy’s future. We’re all buckled up for this banking roller coaster—let’s see where the ride takes us next.
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