Inflation, rates and big bank profits

What a day Wednesday.

We woke up to the overnight news of US inflation and Wall St’s assessment that it was ‘OK news; no it’s not, it’s bad but not terrible news; actually, on third thoughts, it’s pretty goods news; and finally on fourth thoughts, well, it’s probably baddish news’ - and so who knows what Thursday and fifth and sixth thoughts in the Big Apple will bring.

Then our biggest bank delivered the good news that undoubtedly would warm the hearts of all bank customers, borrowers and depositors both: it had trousered a cool $5bn-plus in profit from them, from just six months of trading, as it relished in the circs created by Philip Lowe’s rate rises, the first rate rises in more than a decade.

And then on to the very man himself, as he fronted the first of two collections of backbenchers, with first-up the Senatorial version.

The 2023 Lowe was decidedly agnostic about how many, if any, further rate rises would he deliver – a very decided contrast to the 2021 Lowe who was then the truest of true believers that he wouldn’t be delivering any at all, before 24.

Ah, so, what to make of it all?

Reserve Bank Governor Philip Lowe was grilled on how many additional interest rate rises the central bank intends to deliver when he appeared before a Senate estimates committee at Parliament House in Canberra. Picture: NCA NewsWire / Gary Ramage

First, the latest US CPI numbers were entirely inconclusive about the current level of inflation in the (formerly) mighty US of A; and even more so about where inflation might be headed, and so where the Fed’s interest rate would head.

Let me stress the critically important point, which seemed to pass most commentators by: there will be another monthly inflation report ahead of the next Fed meeting.

Self-evidently, it’s that inflation report which will play the biggest role in the Fed decision.

So while yes, inflation of 0.5 per cent for January – 6 per cent annualised – kicked up from the 0.2 per cent a month it had averaged over the December half, an annualised rate of just 2.8 per cent for that six months, this one-month figure, especially in these febrile times, should be treated with extreme caution.

By any assessment the Fed’s 4.5 per cent to 4.75 per cent official interest rate is restrictive; furthermore, it is operating into an economy that is far more and far more quickly responsive than our own economy.

That is arguably not the case with our RBA’s 3.35 per cent official rate, when our inflation is much higher at 7.8 per cent and was 7.4 per cent annualised in the December half against the 2.8 per cent annualised US inflation in the same half-year.

Without returning too deeply to my discussion yesterday about real interest rates; the comparison is clear and undeniable.

The US has most recent inflation running around 3 per cent and an official rate higher at 4.5 per cent-plus.

We have most recent inflation running around 7 per cent and an official rate lower, much lower, at 3.35 per cent.

The US has a clearly punishingly positive real interest rate, we have an arguably weakish negative real interest rate.

I should add, as one astute reader picked up, I left off the word ‘negative’ yesterday in describing what our real RBA interest rate was.

The CBA certainly had a very ‘real’ rate in its numbers – the ‘net interest margin’ between what it pays depositors and charges borrowers.

Its six months to December was the first big bank report to cover the full period since the RBA started hiking last May.

CBA’s NIM (net interest margin) leapt 23 points to 2.1 per cent.

In dollars, that meant its net interest income leapt just shy of $2bn from the preceding zero interest rate period to a tasty $11.64bn, as the CBA – like all the banks – lifted its lending rates faster and further than its deposit rates.