Bank bonuses to zoom on RBA ’free money’

The RBA board has made a series of decisions aimed at maintaining the ‘free money’ – for the banks – underwriting economic activity and the booming property market.

The Reserve Bank’s ‘big meet’ took place Tuesday and was followed by a rare post-meeting press conference – there’d only been a couple previously – from Governor Philip Lowe.

The meeting made a series of decisions aimed at maintaining the ‘free money’ – for the banks, quite literally free money – underwriting economic activity and, most especially, the booming property market.

This was the case even though key decisions were actually decisions not to do something.

The RBA did not change its official interest rate. That stayed at 0.1 per cent.

The RBA did not change the Commonwealth bond it’s targeting to keep its yield (and the yield on all shorter bonds) at the same 0.1 per cent.

It’s the April 2024 bond, going progressively shorter now than three years.

What it did change – and this was the key reason for the governor’s press conference lest it be misunderstood by the so-called ‘pros’ – was the RBA’s QE, or Quantitative Easing bond-buying program (over and above what it does with the April 2024 bond).

The RBA has been buying $5bn of bonds a week and was – prior to this meet – going to continue to do so until September; now it will buy $4bn of bonds a week, but until November.

RBA governor Philip Lowe. Photographer: Adam Yip

Although the RBA would not concede this, the cutback really only follows the budget deficit down as it drops sharply, not just from year-to-year as specific ,measures like JobKeeper end, but as the deficit falls faster than expected because the economy’s been stronger than Treasury (and the RBA) expected.

A lower deficit means quite simply that the R$BA has to buy fewer bonds to offset any interest rate pressure and maintain liquidity in the financial market.

This ‘taper’ or ‘scale-back’ is seen as the first step towards normalising monetary policy and, sort-of, interest rates; along with sticking with the April 2024 bond and the “no lift in the official rate before early 2024” promise.

This promise though has progressively moderated.

At its first meeting this year in February, the RBA said the board “does not expect” to raise before 2024 “at the earliest”.

This statement said the RBA’s central scenario for the economy was that the trigger for a rate hike would not happen before 2024.

The 2024 “at the earliest” has gone; it’s no longer a board/governor “promise” but just what the RBA’s forecasts suggest; and of course we tick closer to the date anyway as each month passes.

As I’ve written, if push came to shove and the RBA concluded an earlier rate rise was needed, it would lift. In my judgment that will come sooner than ‘early 2024’.

The need for the Fed in the US to hike is going to come much quicker and much more certainly than is the case down here.

In sharp contrast I have zero faith that the Fed will act as promptly as the RBA. There’s every prospect of significant inflation in the US.

The reasons that would drive an RBA rate hike haven’t changed: inflation clearly - the RBA uses the word “sustainably” – in the 2-3 per cent range, because wages growth has gone above 3 per cent and indeed closer to 4 per cent and stayed there.

A big thing to note is that our big banks took all they could of the RBA’s literally free money – the RBA’s only charging them 0.1 per cent interest – before the window closed at June 30.

A month ago the banks had borrowed $134bn; by the end of June they’d borrowed $188bn.

They’ll be lending it out to homebuyers at 2 per cent and rates higher; significantly higher in some cases.

They have to repay the RBA between September 2023 and June 2024.

Tasty, very tasty – as we will see with the bank bonuses this year.