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Will banks pass on the flagged rate cut? That’s the million dollar question.

It’s pretty much a done deal that when the Reserve Bank board meets in two weeks time a cut in the official interest rate will transpire due to the rapid slowdown in economic growth.

But will consumers who are battling mortgage repayments see any of it? That continues to be a heavily debated issue.

There’s growing pressure on the retail banks from the Prime Minister, Kevin Rudd, Federal Treasurer, Wayne Swan and the deputy head of the Reserve Bank, Ric Battelino to do the right thing for consumers and the economy.

But the banks have warned against assuming that they will follow suit or that a cut to lending rates is a foregone conclusion.

Economists are divided.

Finance commentator, Michael Pascoe and Professor Fariborz Moshirian, School of Banking and Finance, University of NSW believe that banks will cave in to the political and public pressure while Professor Joshua Gans, Melbourne University Business School maintains that consumers won’t see a red cent of it in their mortgage rates.

Gans puts this down to a lack of competition in the banking sector, which he says has occurred as a result of the disappearance of many non-bank lenders from the scene due to the collapse of the securitisation market and the high cost of international borrowing.

Non-banks played a significant role in breaking the stranglehold previously held by the banks. The benefits that borrowers have enjoyed could be lost if competition ceases to exist and a bank oligopoly could once again take hold, says Gans.

Tags: Interest, banks, lenders, non-bank, rates

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Replies to This Discussion

Permalink Reply by Bandwidth on August 18, 2008 at 7:12pm

Hello

When you look up the meaning of Oligopoly it does not necessarily mean proce fixing, it could in fact lead to fierce competition. For an Oligopoly to fix prices would require collusion, where they may be able to do that for a while, the ACCC has indicated recently that that will not be tolerated.

If the big four don't act in a competitive manner the small players will return to the marketplace.

In conclusion I don't fully believe that the small players were the only competition in the marketplace the big 4 have been known to compete. This is a comercial marketplace and as such competition will exist.

Academics, while well read and educated, are often not commercially aware and tend to look at the world as a theoretical model. Time has shown these models are often not viable in the real world.

BTW the banks are already dropping the fixed rates

When people make statements as strong as that I wonder are they willing to buy shares in the banks eg putting their money where their mouth is :-)

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Permalink Reply by Jill Fraser-FatCat journalist on August 18, 2008 at 7:36pm

Glad to hear your confidence, Bandwidth.

Yes the big four compete among themselves but you can't dispute an acknowledged fact that the entry of non-bank lenders into the market resulted in lower rates.

In a statement issued by the MFAA (Mortgage and Finance Assoc of Australia) last week, CEO Phil Naylor said "If the credit crunch continues over a long period, we can expect non-bank lenders to feel the pinch. The loss of players in the market will negatively impact on competition and not be in the best interests of borrowers."

Incidentally, I don't think that the inference was price fixing.. although that, as I'm sure you're aware is always a risk with an oligopoly.

Thanks a lot for your thoughts.
Cheers,
Jill

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Permalink Reply by Bandwidth on August 18, 2008 at 8:43pm

Good points

I was thinking, our oligopoly has helped Australia through an number of the past financial crisis eg the Asian and potentially the current one.

In America the banks have very little structure, so when the things get a little rough there is no stabilising effect.

Is it an absolute fact that the non bank lenders lowered the interest rates.

Banks, like oil companies, Telcos, Supermarkets, Transport companies, Airlines and other large infrastructure based companies are always targets for Govt and public bashing.

Wealthy people accept responsibility for their situation and recognise the business practices of these organisation and develop strategies to handle them. The public blame these organistaions for their woes.

If people believe banks will end up with a captive market then buy bank shares :-)

An extra .5% on a $250,000 mortgage is $1250.. per year 20,000 invested in banks and they came back by 15% would return $3000.00 plus dividends.

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Permalink Reply by Jill Fraser-FatCat journalist on August 19, 2008 at 9:20am

Hi Bandwidth,

Now I'm the one to say, good points!

You're right about our banks.. Michael Pascoe noted that we are very fortunate to have profitable, solid banks.. We don’t have a housing crash and we don’t have an economy that’s on the verge of a recession. He made the point that our banks are envied around the world and that right now their big, fat profits are working in our favour.

I applaud your attitude re not levelling blame at others and accepting responsibility for our own decisions.

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Permalink Reply by Bandwidth on August 19, 2008 at 11:41am

Hello Jill

Thank you for your compliments.

I think this site should take the attitudes of the wealthy to heart and encourage responsible actions. There are enough "bashing" sites out there to keep the general public more than happy.

What I have enjoyed about this site is the business attitude the community seems to have towards improving their financial situation.

We all need to congratulate ourselves and keep this attitude up. That way we will save (& make) money, one click at a time

Bandwidth

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Permalink Reply by JeffK on August 20, 2008 at 11:21am

Hear, hear, Bandwidth. It's one of the reasons I keep coming back here - people have the right attitude to improving their lot and heaps of suggestions for one another, rather than having a negative attitude towards everything.

Very refreshing.

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Permalink Reply by Joshua Gans on August 20, 2008 at 11:06am

It is actually a $20 to $30 billion question. Put simply, the competition that has disappeared in this sector shaved 2 to 3 percent off interest rates historically. So if it does not come back Australians will pay the major banks $20-$30 billion per annum more in interest rate payments. And of course that impact compounds over time.

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Permalink Reply by Bandwidth on August 20, 2008 at 11:41am

So great time to invest in the banks ??? :-)

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Permalink Reply by Jill Fraser-FatCat journalist on August 20, 2008 at 11:48am

Hi Joshua,
Thanks a lot for participating in our discussion.
Just letting everyone know that I quoted Joshua in my discussion topic.. He is an economics professor at the University of Melbourne Business School.
Cheers,
Jill

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Permalink Reply by Bandwidth on August 20, 2008 at 11:53am

Hello Joshua

Welcome to the discussions, look forward to your input.

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Permalink Reply by Bandwidth on August 20, 2008 at 12:10pm

Hello Joshua

The comment about "compounding over time" confuses me. if someone pays their interest bill on time then the rise in interest rates is flat over time. It can only compound if either the interest rate rise in a compound fashion or there is interest on outstanding interest.

A 250K loan with a 2% increase in rates is $5k flat per annum for the life of the loan. In fact if it is a principal and interest loan then the impact is reduced over time. Or am I missing something

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Permalink Reply by Bandwidth on August 21, 2008 at 10:33am

I feel this will be a commercial decision, regardless of public emotion

NATIONAL Australia Bank today confirmed it will pass on in full a 25 basis point rate cut if the Reserve Bank reduces the official cash rate by that amount at its September board meeting.

http://www.news.com.au/business/story/0,27753,24217021-31037,00.html