Australia Reserve Bank’s $10bn gift to banks to help with rate stress or profits?
The Reserve Bank of Australia will pay the big banks $10 billion a year in interest for money the banks have sitting in deposit. Callum Foote and Michael West look at why the RBA has chosen to start paying interest on almost half a trillion dollars sitting in its settlement accounts.
It was lovely to see Australia’s biggest bank, the Commonwealth deliver such a handsome profit this week, some $2.4b in cash profits for the third quarter, which equates to an annual take of $10bn in cash. That’s profit, not revenue. Yet another milestone, yet another record smashed.
The CBA’s Big 4 banking peer Westpac had only just handed down its half yearly $3.1bn profit. All four banks, of course, were mighty quick off the mark to pass on the 0.25% hike in the Reserve Bank’s cash rate the other day. None of this dilly-dallying which occurred on the way down when the central bank would cut rates and the Big Four would play chicken to see who could pass on the rate cut last.
Despite their stratospheric profits, their economists are tut-tutting about proposals for meagre $1 per hour wages rises which would save low-income Australians from further wage stagnation.
In any case, the banks are cleaning up, they always do. And the Reserve Bank is being unusually charitable to them by offering to pay them interest on the $406bn they have sitting on deposit in their Exchange Settlement Accounts (ESAs).
That’s another $10bn a year in interest payments to feed the bottom line and keep shareholders happy with their juicy franking credit subsidies on top.
We will get to the why and wherefore of this largesse shortly for those who are keen to find out more about mega-freebies.
Some broader perspective first. Inflation has taken off and interest rates are on the rise. This of course puts many Australians in a tricky position because they have been flogged a lot of credit in recent years as rates hit record lows. Hundreds of thousands of new homebuyers will never have experienced rising rates.
The point is, it could get nasty. Australia has among the highest levels of household indebtedness in the world ($3.1trillion) and that leverage puts the whole housing market at risk.
Who knows how high rates will go? Nobody. There is no reason inflation cannot go to 10% and the cost of mortgages could double. Rates may well spike and fall again. This is all high conjecture. What is reasonable conjecture however is that the government will always protect the banks and the stability of the financial system.
https://michaelwest.com.au/mollycoddled-reserve-banks-10bn-gift-to-banks-to-help-with-rate-stress-or-profits/