The amnesiacs’ interest rate inquiry

In the perpetual present of political reportage in Australia, where no one seems to recall what happened five minutes ago, entire issues play out in perfect repetition. In the Rudd and Gillard years, when the major banks declined to pass on interest rate cuts in full — or lifted rates faster than the RBA raised them — treasurer Wayne Swan would savage the banks and urge consumers to “shop around”, shadow treasurer Joe Hockey would savage him for being “treated with contempt” by the banks, an inquiry or two would be held and the government would unveil reforms to facilitate competition.

Nearly a decade later, when banks don’t pass on interest rate cuts, Treasurer Josh Frydenberg savages the banks and urges consumers to “shop around”, while shadow treasurer Jim Chalmers (previously Swan’s chief of staff) says the banks are “thumbing their noses”. Today we got the next step: another inquiry, by the Australian Competition and Consumer Commission (ACCC), into residential mortgage pricing. That will include “investigating barriers that may prevent consumers from switching lenders”. Maybe Frydenberg thinks Swan didn’t go far enough on that front… although the critics thought he’d gone too far back then.

At least not everyone is an amnesiac: the government’s talking points for the day, mistakenly emailed to the press gallery this morning, specifically cover off complaints that inquiries have been held before. The banking royal commission, the talking points said, “specifically focused on misconduct”, while the ACCC’s previous mortgage inquiry “specifically focused on whether the Major Bank Levy affected the prices charged for residential mortgages”. That’s not quite true — the government may have asked for an inquiry into the impact of the major bank levy, but if you read the resulting report, the ACCC did the whole box and dice on residential mortgage pricing, not just on the impact of the levy.

That’s not even the most redundant part of this whole empty exercise. It’s barely a year since the Productivity Commission (PC) did a monster 600-page report on competition in the Australian financial system at the request of then-treasurer Scott Morrison, including competition in mortgage lending. That’s the report that caused a ruckus by arguing there was too much emphasis in financial regulation on stability and not enough on competition — and that regulation was actually harming competition. Of course, since then, more regulation has been piled on the banks in the aftermath of that other little inquiry we had last year.

The PC also noted that more competition wasn’t going to help a lot since customers were too lazy to take advantage of it. “Market power reinforced by consumer inertia,” the PC called it; consumers should “shop around” more (ditto insurance).

All this theatre and millions of dollars in inquiries is particularly pointless when you note that the Reserve Bank takes into account the banks’ failure to pass on interest rate cuts when making interest rate decisions: if banks fail to pass on full rate cuts and that reduces the amount of monetary stimulus the RBA wants, they will merely encourage it to cut rates further. The RBA will achieve the level of monetary stimulus it wants, whether the banks pass on each individual rate cut in full or not.

There are, however, a couple of differences this time around that didn’t apply when it was Wayne Swan in the chair and Joe Hockey deriding him from opposition. One is the “profit” part of the charge of profiteering against the banks. Thursday sees the tiddler regional bank, Bank of Queensland, report its 2018-19 results. It won’t be pretty. At the end of this month, the ANZ releases its 2018-19 results, followed by Westpac and the NAB in the next week. It’s increasingly likely that the banks will be forced to cut dividends to maintain capital levels and pay for the billions of dollars in customer remediation flowing from the royal commission.

Watch for the whining from shareholders about too much regulation and intervention — especially wealthy seniors (sorry, “quiet Australians”), who rely on bank dividends and the franking credits rort — when 2019 and 2020 returns start falling short. It’s the oldest conflict in Australian finance — between aggrieved, complaining bank customer and income-hungry shareholder.

The other difference is that in late 2010, not long before Swan’s “shopping around” package, the RBA increased rates to 4.75% — the last of seven rises starting in late 2009. That was the last interest rate rise we’ve seen — it’s been all the way down ever since, cut after cut after cut. Now it’s 0.75%. There’s a good chance it’ll be 0.5% before too long. Our problem isn’t greedy banks any more. It’s Scott Morrison’s great economic stagnation.

Do we really need another inquiry into why the banks don’t pass on interest rate cuts? Send your thoughts to boss@crikey.com.au. Please include your full name for publication.