Largesse for banks, but not a crumb for retirees

RBA governor Philip Lowe has committed to keep the official rate at 0.1 per cent until inflation is actually back firmly in the 2-3 per cent range.

RBA governor Philip Lowe has committed to keep the official rate at 0.1 per cent until inflation is actually back firmly in the 2-3 per cent range. Picture: Saeed KHAN / AFP

Ah, those were the days. Before this one, the last time the Reserve Bank changed its official interest rate on Melbourne Cup Day was nearly a decade ago in 2011 — it raised it, to 4.5 per cent.

Even with home loan rates — albeit not the variable variety — today going below 2 per cent for the first time in Australian financial history, who would not seriously want to go back to the hopes and expectations of 2011 when we thought, again we hoped, we were emerging from the global financial crisis into sunlit uplands bestowed by a benevolent China.

Indeed, in my judgment, not despite those sub-2 per cent home loans but precisely because of them. They do not speak to a healthy reality; they are going to make dramatically worse our unhealthy, dangerous and distorting if entirely understandable and rational infatuation with property.

The contrast of this — all-but deserted — Cup Day with 2011 could not have been more stark or telling, with the RBA of course cutting its cash rate to the barest possible point above zero — 0.1 per cent — and extraordinary as that was, it paled beside all the other things the Reserve Bank set about doing.

This is buying a literally unlimited amount of Commonwealth bonds to keep the yield on all securities out to three years on the curve from going above that 0.1 per cent. The bank will buy whatever it takes.

This is buying — an initial — $100bn of Commonwealth and state bonds of between five and 10-year maturities; and, again quite literally, printing up to — again, an initial — $200bn and lending it to the banks at that same 0.1 per cent.

The banks do pay a penalty: in future they will only get, drum roll please, zero per cent on any funds they leave on deposit at the RBA. This was the one surprise: it had been casually expected the RBA would pay them the same 0.1 per cent.

Now, I’ve added those words “an initial” to both the bond-buying and the lending (the TFF or Term Funding Facility) — the RBA didn’t use them — on the basis that if the circumstances end up demanding more, Oliver Twist-style, the RBA will deliver more, unlike Bumble the beadle.

The $100bn has been fixed by the RBA. It will buy the securities in a structured program. The $200bn TFF is driven by demand from the banks; at last count they had only borrowed $80bn or so. They will go to $200bn; it is my judgment that after that they will want more.

When I asked NBA chief executive Ross McEwan on Thursday, why the bank had borrowed its share of the TFF (at pre-Tuesday’s 0.25 per cent), he seemed almost bemused.

I of course already knew the answer; it was easily the cheapest money (outside interest-free deposits and NAB has its ‘fair’’ share of those). I just wanted him to spell it out explicitly; and he did.

Right now, NAB has around 3 per cent of all its funding from the TFF; it expects it will get that up to 8-10 per cent. The other big banks would be, and will be, exactly the same. That is a lot of very cheap — effectively free — money.

It is also precisely what the RBA intends. It wants to deliver both guaranteed quantity and price of funding into the banks. It wants, it expects, them to on-lend.

It expects, it hopes, that competition, and broader capital market dynamics, will keep them honest — that this won’t feed into margin and on into profit.

If demand drives the need for more TFF-funding, or capital market volatility — of which there could be many drivers — makes it difficult or expensive to access global wholesale markets; the RBA will increase the TFF.

It fits into the broader dynamic and the interlocking structure built around the 0.1 per cent official rate.

RBA governor Philip Lowe has committed to keep the official rate at 0.1 per cent until inflation is actually back firmly in the 2-3 per cent range; no longer just heading into the range.

Both his rhetoric and the RBA forecasts make it clear the expectation that this will be in 2024 at the earliest; this is also explicitly underscored by targeting the official 0.1 per cent out rate to three years on the bond curve.

Just as he will keep the cash rate at 0.1 per cent “for as long as it takes”; he will buy “as many (short-dated bonds) as it takes” to keep that yield at 0.1 per cent; and he will increase the TFF to “as much as it takes” to keep sufficient bank funding at the 0.1 per cent.

He will also revisit the longer bond-buying program as necessary to complement and integrate with all that.

The one big certainty he delivered on Tuesday is the 0.1 per cent as the centrepiece of all this.

I think he could have done it all at 0.25 per cent and left some crumbs on the table for pensioners with their miserable levels of cash savings; and also self-funded retirees who in their 70s and 80s — and in a time of plague — don’t want to be forced to put their trust in Wolves of Wall Street, of Collins and George streets, to try to get some sort of yield.

But I also fully understand why in this time of global zero rates, he believed he had to do it at 0.1 per cent; and once decided, better done now — also, hopefully drawing a line in something more substantial than sand against going below zero.

This policy structure is both driven by the forecast expectations for the economy and in turn is aimed at driving those outcomes.

So, when the RBA says it sees growth of 5 per cent in 2021, it is both saying it expected much less, absent its massive stimulus, and the stimulus is aimed at getting us that.

We shall of course, as always, see.