I must admit, I didn't pay much attention to the race that stops a nation today. I was too busy trying to work out why the central bank largely surprised the market by lifting the official cash rate to 4.75 per cent.
Despite the latest inflation numbers showing consumer prices fell to between the RBA's two to three per cent target band, the bank was concerned about future inflationary pressures. It went on to say that the moderation in inflation that has been under way for the past two years is probably now close to ending, and inflation is likely to rise over the next few years.
So the RBA took a pre-emptive shot to counter rising consumer prices. Was it really a surprise? Well looking back at some of the interviews I've done over the past week - no. Was the CBA lifting rates above and beyond the RBA's move a surprise? Again, no.
Last week I spoke to Helen Kevans from JP Morgan on SBS World News Australia. At the time, the market was only pricing in a 17 per cent chance we'd see an RBA rate rise. However, she was concerned about the capacity constrains that the Australian employment market was starting to show.
That is, there are more and more people in the workforce, meaning fewer available people to compete for skilled jobs. In turn, employers have to increase salaries to attract quality employees to leave their current positions, but that means wage price pressures leading to higher inflation.
To her, and the investment bank's credit, Helen and JP Morgan predicted the RBA would move.
That same day, I spoke to Andrew Stabback from AB+F Magazine. I was actually speaking to him about a number of other banking issues, but he did say that it was likely the big banks would lift rates out of cycle as much as 10 to 15 basis points. The point of the story was that if the majors did do that and the smaller regional, non-banks followed, it would be good for competition in the sector.
Let me take that point firstly. The smaller regional and non-bank players have been doing it tough lately. The global financial crisis has made it more expensive for the banks to buy money to lend to Australian consumers, and that's why we're seeing the banks threaten to lift rates to pay for what they call wholesale funding.
Because of scale, the smaller banks aren't able to compete with the big boys, but by following any rate rise by the likes of CBA, ANZ, Westpac and NAB, it gives them enough room to move and get back in the game of competing.
That 10 to 15 basis point rise is exactly the buffer the smaller players need to reinvigorate competition, according to Mr Stabback. That's the easiest way to explain the securitisation market without giving me – and you – a headache. So at the end of the day, competition would be increased.
Question number two: Why lift rates when the banks are making billion of dollars? Well, first of all, Australia's banks are listed companies. They operate on the Australian Stock Exchange and their first priority is to their shareholders.
Secondly, the higher cost of funding is squeezing the margins on that side of the business. That is, the profits there aren't growing as strongly, and that's something no manager wants in any business. So they have to make it grow, ideally without impacting other parts of the balance sheet.
But what concerns me, is the following line from the CBA's statement, explaining why it lifted rates by 45 basis points. The CBA says that 60 per cent of its home loan funding comes from consumer deposits, and that increased competition – that is, consumers moving to other banks, big or small – means a smaller pool of funds to draw upon. So that too means higher rates.
Now, note the point Andrew Stabback was making about higher rates in the industry: they're supposed to increase competition by making sure the smaller regionals can re-enter the market, especially for home loans. Vicious cycle much?
On the upside, most of the commentary I've been reading says future rate rises will depend on what level the banks pass on the RBA's rate rise. While there's no doubt we are in a rising interest rate environment, perhaps the speed in which we'll see those rate rises may have slowed.
Let's not forget too, while higher rates are bad news for borrowers, if you're a saver, you'd be feeling like you'd just won the Melbourne Cup.
(Note – only the CBA passed on the RBA rate rise at the time of writing.)
