The banks don’t want you to enjoy lower rates.
One of the things about being trained in the dark-arts of marketing like I am, is that you recognise a publicity campaign when you see one.
They happen all the time. Most of them just slip under the radar. They subtly slip into the collective consciousness, and just become fact.
“Women need to eat more meat, because iron,” for example.
Anyway, one of these clandestine campaigns came up on my radar the other day. While most people were celebrating last week’s rate cut, The Australian Financial Review was not loving it.
In fact, it started running a bunch of articles about how we didn’t really need rate cuts, and in fact, rate cuts weren’t good for us anyway.
Like this little nugget from Morgan Stanley’s James Gorman:
Morgan Stanley chief executive James Gorman has warned central banks that further cuts to official interest rates risk reducing their “firepower” to deal with an unforseen geopolitical crisis.
After Reserve Bank of Australia governor Philip Lowe suggested the official cash rate could fall to 1 per cent and US Federal Reserve chairman Jay Powell indicated US rates could move lower amid fears escalating trade tensions will hit the US economy, Mr Gorman described monetary policy as unpredictable and limited in its impact.
Won’t somebody think of the unforseen factors?
Or there was former RBA Deputy Governor Stephen Grenville:
Former Reserve Bank of Australia deputy governor Stephen Grenville has challenged the effectiveness of the RBA’s inflation target and interest rate cut, as he warned that cheap borrowing costs distort housing and stockmarkets.
Following the historic reduction in the RBA’s cash rate to a record-low 1.25 per cent on Tuesday, Dr Grenville writes in The Australian Financial Review today that negative real (inflation adjusted) interest rates “don’t make much sense” and fiscal policy should play a larger role to stimulate the economy.
Yeah, kinda. Fiscal policy (government spending) could definitely be doing a bit more heavy lifting, but that’s hardly news.
And there was a raft of others, none of them any more insightful or persuasive than these.
And so when you see a string of weak arguments for something, all supposedly unrelated, but adding together to give the impression of a broad consensus, then you know you’re in a clandestine publicity campaign.
But I’m like, why? Who doesn’t love rate cuts?
So I did a bit of digging. And you know who doesn’t love rate cuts?
Turns out that when interest rates get super-low, the banks have much less flexibility to manage their money, and that starts cutting into their profit margins.
That’s what the analysts at Goldman Sachs reckon:
…if the cash rate was to fall below 1.50%, every additional rate cut thereafter would shave about 5 bp off sector margins. The sensitivity of margins to falling rates accelerates once the cash rate falls below 1.50% because the various levers the banks have at their disposal become less flexible as the cash rate approaches zero and we would particularly highlight the following:
So banks don’t like rate cuts because the lower rates go, the more it binds their hands, and the less profit they can make.
And so what do you do? You use your mouth piece (The Australian Financial Review) to start campaigning against rate cuts…
… no matter what the country needs, no matter what the economy needs, and no matter what the property market or individual borrowers need.
Nope. It’s bank profits and everyone else be damned.
That Royal Commission sure was money well spent, wasn’t it?