The ‘Big Four’ Banks’ Tightrope Walk: Profits, Interest Rates and the RBA’s Pendulum Swing!

Australia’s Reserve Bank (RBA) is on the cusp of a key interest rates decision this August 1st, with the country’s banking storyline thickening like a mystery novel. Our “Big Four” – ANZ, Westpac, NAB, and the Commonwealth Bank of Australia (CBA) – have charted a new course. The focus is now on securing profits and dividends, which, albeit hard on borrowers, is recharging the banks’ somewhat flagging profitability, unfolding a unique balancing act in finance.

These big-league players are upping home loan interest rates for fresh customers, pushing past the RBA’s cash rate hikes. We’ve seen a strategic U-turn from aggressive home loan discounting to a focus on margin management, a defining moment for the Australian banking scene.

A sharp 0.32% rise over the RBA’s rate hikes sets a new benchmark for basic home loans this year, with the CBA at the helm of this movement. This switch from last year’s ‘maximize loan-book growth’ tactic shields profits in a tough market.

The ripple effects of this strategy shift fall squarely on mortgage holders. For instance, borrowers with a million-dollar loan are coughing up an additional $29,200 per year, a startling evolution since the central bank hiked rates in May of last year. But for bank investors, worried about dipping profits, these increased rates are the silver lining.

The trend of major banks discontinuing cashback offers suggests competitive pressure easing. This has taken some heat off the RBA, even as the big banks have hiked rates for new borrowers approximately 4.5 times over the past five months, a step ahead of RBA’s three cash rate increments in the same window.

Corroborating this trend are the latest rate hikes for new customers, particularly ANZ’s up to 0.15 percentage point hike for its basic variable home loan rate. Others, like NAB’s Base Variable rate, ANZ’s Simplicity Plus product, and Westpac’s Flexi First Option, have also joined in, with a 1.25 percentage point hike.

As these banks gradually move away from heavy discounting for new customers, all eyes are on the RBA’s pending interest rate decision. The million-dollar question is: Will the RBA hike rates even if it tips the economy into recession?

The haunting shadow of a recession – with potential job losses, poor job prospects for recent graduates, and possible business collapses – is a persistent nightmare. Respected economists Alex Joiner, IFM Investors’ Chief Economist, and Stephen Koukoulas, the Prime Minister’s Advisor, express concerns over the RBA’s recent assertive monetary policy, suggesting the RBA might be overstepping.

Such fears are backed by recent macroeconomic indicators, like the slowing inflation rate from 7.8% to 6% YoY in the June quarter. A projection of the latest 0.8% inflation rise for the June quarter over a year suggests the inflation rate may ease to around 3.3%.

Adding to this caution is the central banking “lags” principle, indicating that interest rate changes’ full impact might take up to a year to fully show. Signs of slowing economic activity since March – a meagre 0.2% GDP and consumer spending growth, slowing job growth despite a 3.5% unemployment rate and a 32,600 June employment increase – bolster these worries.

Alex Joiner’s recent comments accentuate this uncertainty, noting July’s inflation gauge rebounding after a soft June. He added that house prices across major cities have seen slight increases, with Sydney recording a 0.9% growth, Melbourne 0.3%, Brisbane and Adelaide both 1.4%, Perth 1.0%, and a 0.9% rise across the five cities.

On the other hand, Stephen Koukoulas focuses on the consumer sector. “Another dismal retail trade result – looks like the consumer recession will hit the third consecutive quarter. Ouch!” His comments, coupled with the June inflation data, make the idea of an RBA rate hike next week seem absurd.

The argument against more rate hikes is reinforced by the “lags” concept in central banking, indicating a one-year delay for the full impact of interest rate adjustments to take effect. The sluggish economic activity since March quarter and slowing employment growth despite a June unemployment rate of 3.5%, and an employment increase of 32,600, echo this sentiment.

Other elements that might sway the RBA’s decision include the fiscal policy and a robust federal budget surplus of at least $20 billion. There’s also the constant lag in wage growth versus price hikes over the past decade, reducing household incomes and spending, which could be amplified by more interest rate hikes.

As Australia awaits the RBA’s decision tomorrow, it’s clear the banking sector is undergoing a major shift. The RBA’s decisions will significantly influence the economy’s future. We’re all buckled in for this banking thrill ride – let’s see where it takes us!

 

 

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Maria Irene
Maria Irenehttp://ledgerlife.io/
Maria Irene is a multi-faceted journalist with a focus on various domains including Cryptocurrency, NFTs, Real Estate, Energy, and Macroeconomics. With over a year of experience, she has produced an array of video content, news stories, and in-depth analyses. Her journalistic endeavours also involve a detailed exploration of the Australia-India partnership, pinpointing avenues for mutual collaboration. In addition to her work in journalism, Maria crafts easily digestible financial content for a specialised platform, demystifying complex economic theories for the layperson. She holds a strong belief that journalism should go beyond mere reporting; it should instigate meaningful discussions and effect change by spotlighting vital global issues. Committed to enriching public discourse, Maria aims to keep her audience not just well-informed, but also actively engaged across various platforms, encouraging them to partake in crucial global conversations.

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