Reserve Bank losing monetary mojo

The Reserve Bank of Australia (RBA) raised the overnight cash rate 0.25% (25 basis points) today, but the Commonwealth Bank announced it would raise its mortgage rate by 0.45% (45 basis points).  This prompted a going-through-the-motions attack on the Commonwealth Bank from the Treasurer:

Wayne Swan blasts CBA ‘cash grab’

The Treasurer needs to reflect the public’s anger at the Commonwealth Bank, but won’t do anything substantive about it, because the Bank is too important to the stability of the Australian economy.

Full credit to the Treasurer so far, though, in resisting calls for the Government to re-regulate interest rates.  That would be a backward step, as it would likely result in high inflation as politicians keep interest rates artificially low for political reasons.

The Treasurer has been put in a difficult position by the declining power of the RBA to influence mortgage rates in a world where banks are sourcing so much of their funding from overseas rather than domestically.  The funding costs of our banks have been driven up by the tightening of credit in global markets which began with the US sub-prime mortgage crisis in 2007.

You can see the heavy reliance of our banks on overseas borrowing in one of the ABS’s lesser known but extremely useful publications, the Financial (a.k.a flow of funds) Accounts, which reports that in 2009-10:

Significant flows during the year ended June 2010 were the net $39.8b and net $39.0b general government borrowed from financial corporations and rest of world respectively and the net $34.4b households deposited with financial corporations. Financial corporations borrowed $48.0b from rest of world and also lent $2.9b to non–financial corporations. Non–financial corporations repaid $11.2b to rest of world.

The $48 billion that financial corporations (mainly banks) borrowed from the rest of the world significantly exceeded the $34.4 billion that households deposited with them (in net terms).

So the banks are right to argue their funding costs are driven by overseas factors and the RBA cash rate isn’t as important as it once was.  Clearly the RBA is losing its monetary mojo.

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