If a central bank is charged with supervision as well as monetary policy, it will naturally lean to high interest rates. A bank supervisor is primarily concerned with banks' health, and unprofitable banks are unhealthy banks. (Profitable life insurance depends even more on high interest rates.)
Banks are supposed to be intermediaries, so changes in the level of interest rates ought not affect their spread and profitability. If it does enough for it to be an efficiency or distributional problem, then that should be dealt with by regulators and taxation. Why should it affect the RBA targeting?
The National Bank has joined Westpac in announcing record annual profits. They also joined with Westpac and the ANZ in raising their variable mortgage rate. Not surprisingly they only raised one fixed term deposit rate. Most long term savers will have to wait for any rate rise for their accounts.
We may put that classic blowtorch question to any rate rise by the RBA:
“WHO BENEFITS”
Well anyone who lends money really. There is a long term practice called arbitrage. This is where a surplus unit, one with spare cash to lend, actually borrows more money and then lends that money at exorbitant interest rates. If interest rates go up then they can increase their margins on their loans. As long as they themselves can borrow money cheaply, they stand to make supernormal profits. The law on Australia is very harsh on anyone who defaults on a loan.
Now there are secondary beneficiaries. Anyone who owns shares in banks will eventually benefit, CEOs of large financial
companies will benefit from higher bonuses, buyers of properties from distresses sellers (who can no longer afford to make interest payments on mortgages) will benefit in terms of capital gain and companies that have the lowest leveraged books will benefit as business loans get dearer. There are also tertiary beneficiaries like financial consultants who renegotiate mortgages for high fees, buyers of jewellery and second hand household items, removalists, real estate agents, home building inspectors and property lawyers. Of course this is not the end of the beneficiaries chain. There are quarternary beneficiaries like auctioneers of seized property, loan sharks and pawn brokers. But wait there’s more. The quinary beneficiaries are the businesses who find their employees much less willing to change jobs. For lower paid employees that is bad news for any wage rise.
Of course there are losers:
any household with a strained budget, anyone unemployed, pensioners who are solely dependent on their pension, most tertiary students, anyone on a fixed income, charities, businesses that are highly leveraged, local councils, community help organisations, anyone just entering the workforce, low paid workers close to retirement, anyone heavily in debt and many primary producers.
But the RBA does not care about the losers. They have not done a paper on the social costs of lifting interest rates. It’s best not to ask them what the Mums and Dads can do to pay even higher loans rates. The reason is that they just don’t know.
Wake up Australia?
But then again, it took me a long time to understand what RBA's in various places are really about.
So, did we ever leave the Dark Ages?
Nah. still on an Orwellian road to Serfdom.
Ok, not a long post. What gives in the world at the moment is depressing.
If a central bank is charged with supervision as well as monetary policy, it will naturally lean to high interest rates. A bank supervisor is primarily concerned with banks' health, and unprofitable banks are unhealthy banks. (Profitable life insurance depends even more on high interest rates.)
Slightly OT, but the Brazilian central bank offers a counterexample of such an institution acting in the interests of citizens. It has created a low-cost instant money transfer system called Pix https://www.pagbrasil.com/insights/pix-10-questions-and-answers-about-brazils-instant-payment-method/: Anybody can use Pix, and large banks are required to offer it, though they can set their own fees to business customers. The system is very successful and user-friendly: Lu uses it regularly to make payments in Brazil by phone and Internet from here in Spain. Payments sent are free of charge to individuals and mom-and-pop businesses, larger ones pay the CB 1%,, capped at R$10 (A$3.15). More on fees here, in Portuguese: https://www1.folha.uol.com.br/mpme/2021/09/saiba-como-funciona-a-cobranca-de-taxa-do-pix-para-empresas.shtml.
Banks are supposed to be intermediaries, so changes in the level of interest rates ought not affect their spread and profitability. If it does enough for it to be an efficiency or distributional problem, then that should be dealt with by regulators and taxation. Why should it affect the RBA targeting?
The National Bank has joined Westpac in announcing record annual profits. They also joined with Westpac and the ANZ in raising their variable mortgage rate. Not surprisingly they only raised one fixed term deposit rate. Most long term savers will have to wait for any rate rise for their accounts.
We may put that classic blowtorch question to any rate rise by the RBA:
“WHO BENEFITS”
Well anyone who lends money really. There is a long term practice called arbitrage. This is where a surplus unit, one with spare cash to lend, actually borrows more money and then lends that money at exorbitant interest rates. If interest rates go up then they can increase their margins on their loans. As long as they themselves can borrow money cheaply, they stand to make supernormal profits. The law on Australia is very harsh on anyone who defaults on a loan.
Now there are secondary beneficiaries. Anyone who owns shares in banks will eventually benefit, CEOs of large financial
companies will benefit from higher bonuses, buyers of properties from distresses sellers (who can no longer afford to make interest payments on mortgages) will benefit in terms of capital gain and companies that have the lowest leveraged books will benefit as business loans get dearer. There are also tertiary beneficiaries like financial consultants who renegotiate mortgages for high fees, buyers of jewellery and second hand household items, removalists, real estate agents, home building inspectors and property lawyers. Of course this is not the end of the beneficiaries chain. There are quarternary beneficiaries like auctioneers of seized property, loan sharks and pawn brokers. But wait there’s more. The quinary beneficiaries are the businesses who find their employees much less willing to change jobs. For lower paid employees that is bad news for any wage rise.
Of course there are losers:
any household with a strained budget, anyone unemployed, pensioners who are solely dependent on their pension, most tertiary students, anyone on a fixed income, charities, businesses that are highly leveraged, local councils, community help organisations, anyone just entering the workforce, low paid workers close to retirement, anyone heavily in debt and many primary producers.
But the RBA does not care about the losers. They have not done a paper on the social costs of lifting interest rates. It’s best not to ask them what the Mums and Dads can do to pay even higher loans rates. The reason is that they just don’t know.
Join the queue.