Reserve Bank of Australia (RBA) governor Glenn Stevens does not believe it is the job of the central bank to tell retail banks to take a hit on their profits so they can offer lower lending rates.
Mr Stevens told federal politicians during his six-monthly hearing that interest rates are about where the RBA wants them, even after taking into account the banks’ decision to lift lending rates independently in February.
The decision that raised the big banks’ standard variable rates by six to 10 basis points, after the central bank had left the cash rate unchanged earlier this month, caused uproar among the community and politicians, given the banks’ profitability.
But Mr Stevens says it is not for him to set their lending rates.
“I’m not sure there is a role for the Reserve Bank really in jawboning bank shareholders to accept lower returns on equity,” he told the hearing in Sydney on Friday.
“If it is a social judgement that should happen, I don’t think it is for us to make. I think that would be for the political process to do.”
But he said you need to be careful that once you start telling one industry what they can charge, you don’t do the same to other businesses.
“That’s not really the kind of economy we have,” he said.
The central bank left the cash rate unchanged at 4.25 per cent at its February board meeting, having cut it by 25 basis points at both its November and December meetings, cuts which the banks passed on in full to their customers.
Mr Stevens said he had actually been a little surprised when banks passed on all the December cut.
Of the banks’ current interest rates, he said, “These rates are roughly where we think is appropriate for the circumstances we face.”
Asked whether banks were too profitable, Mr Stevens said, “If I have to choose between unprofitable ones and profitable ones, I’d choose the latter.”
“You only have to look at the dimension of the bank problems in Europe to see that we don’t want banks that can’t earn a good return,” he said.
He added that the banks’ rate of return on equity over the past 20 years was “good”, but broadly in line with the listed-company sector in general.
There was no question that, relative to the cash rate, term funding in wholesale markets had risen.
“When people say those costs have risen, it is true,” he said.
“I’m not here to defend the banks. They can defend themselves. But, most businesses seek to reflect their costs in the prices of their products if they can, and that industry is no different in that respect.”
He said the cash rate was probably around 100 basis points lower now to offset the conditions faced by the banks.
As such he did not think the central bank had lost control of monetary policy.
“I think we are still making calls to where monetary policy ought to be and there is just a small amount of slippage in the transmission,” he said.
One argument pointed at the major banks when they make independent rate moves is that apart from being hugely profitable, they also enjoy a government guarantee on their deposits.
But Mr Stevens believes the guarantee is more of an advantage for smaller institutions, given the bigger institutions naturally have larger resources.
