Tim Harcourt

Today’s comments by Prime Minister Julia Gillard – in which she said the Reserve Bank of Australia has room to lower interest rates – would counter the recent rises in mortgage rates by retail banks.

The unilateral increase by ANZ has prompted the latest round of Government-Banker tension. Whilst the Banks are claiming that funding issues have increased sharply and in the short term they have to recover costs, they should also consider the customer. The banks did receive a guarantee from the same Government at the height of the Lehman Brothers Crisis – so maybe now is the time to consider thanking the government and borrowers by not raising rates. Their reasons for raising rates become ever more tenuous as funding costs fall, and if the government does deliver a budget surplus it would provide room for more cuts by the RBA – plus giving a buffer to international economic instability and could help protect jobs.

The ANZ has raised its interest rates on mortgages and small business lending by 6 basis points, blaming continued cost pressures from deposits and wholesale funding, lifting the ANZ’s standard variable mortgage interest rate to 7.42 per cent. However no other major bank has followed this increase.

The ANZ becomes increasingly isolated in its decision to set interest rates independently of the RBA, because it is clear that although lending costs did rise earlier in the year, they also fell again recently. Funding issues have changed sharply and although in the short term they have to recover costs, there is not that much evidence to back up the latest hike – and there are questions as to whether the banks decisions are justified or wise.

We also have to ask what does unilateral action by ANZ and the others mean for the Reserve Bank’s potency in terms of monetary policy? Can the private banks ignore the RBA? In many ways the RBA has already answered this question, with one of its leading lights, Assistant Governor Guy Debelle saying in a recent speech that the RBA did take into account the funding pressures the banks are experiencing. If they have done that – there is no case for any more rate hikes by the retail banks.

Tim Harcourt, is the JW Neville Fellow in Economics at the Australian School of Business