Banks’ margin squeeze doesn’t worry RBA’s Debelle


“One thing I’m not particularly worried about in a low interest rate environment is its effect on bank interest margins,” Dr Debelle said at a Financial Services Institute of Australasia lunch in Sydney.

Following a speech that highlighted the improvement in loan quality from better credit standards, Dr Debelle said banks also benefited from low rates because it meant fewer loans went bad.

“I think that sometimes seems to get missed in the discussion here. We are setting policy to ensure a strong Australian economy,” he said.

The comments come amid a growing debate among business leaders and some politicians about whether the RBA has cut interest rates too low.

On Friday, National Australia Bank chief executive Phil Chronican repeated his concern that rate cuts had lost their ability to stimulate the economy.

“I worry that monetary policy generally has generally lost its potency,” Mr Chronican said before the government’s banking inquiry in Canberra.

In a sign of the pressure on margins from cutting rates, Mr Chronican also said it had become “impossible” for the bank to pass on the full value of interest rate cuts to deposit customers.

Dr Debelle called for patience when assessing the impact of rate cuts, saying that although “instantaneous gratification” was desired, this is not how monetary policy worked.  He said it was “possible” that monetary policy, which refers to moving interest rates, was “slightly less effective than in the past but it’s absolutely still effective.”

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Aside from low rates, another key source of pressure on bank margins has come from lenders offering increasingly deep discounts to new customers. The practice means existing customers end up paying higher interest rates than new borrowers, and it will be scrutinised in an inquiry by the Australian Competition and Consumer Commission.

Mr Chronican acknowledged the practice means existing customers’ rates could become uncompetitive over time, but said NAB had sought to address this by offering customers an annual review of their mortgage.

Deputy committee chair, Labor MP Andrew Leigh, appeared unconvinced. “Why is it that those customers have to respond to a request for a review, rather than simply receiving the same rate as a new customer would get? Aren’t you profiting from inertia?” Dr Leigh asked.

Mr Chronican replied: “It doesn’t exactly feel like that. It’s a competitive market to get new business.”

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