NewsBite

The cost of punishing savers with low-rates policy

Magellan’s Hamish Douglass is among those who believe low rates are having a counter-productive impact on growth. Pic: Hollie Adams
Magellan’s Hamish Douglass is among those who believe low rates are having a counter-productive impact on growth. Pic: Hollie Adams

This week, in his final address as Reserve Bank governor, Glenn Stevens referred to the limitations to the capacity of monetary policy alone to boost growth sustainably. Magellan Financial’s Hamish Douglass went a step further, saying ultra-low interest rates might actually be anti-stimulatory.

Their comments put them within a growing list of commentators, including some from the Bank for International Settlements, who are sceptical that the unconventional monetary policies that the world’s bigger central banks have pursued since the financial crisis can actually deliver any reasonable level of growth.

Indeed there are those, like Douglass, who believe that ultra-low or even negative official rates, by punishing savers and sending unnerving signals to consumers and companies, are having a counter-productive impact on the growth.

The beneficiaries of the low-rate environment, households and companies with debt, aren’t spending and investing but rather using the windfall of the lower rates to pay down their debts faster and, in the case of companies, to return cash to yield-hungry investors rather than borrowing to invest.

Douglass noted that the rate environment was distorting asset prices — it has forced investors to accept a lot more risk for ever-lower returns — and also that, by taking income away from savers, there was a large multiplier effect within the economy as they consumed less.

That was, in effect, the point that Commonwealth Bank’s Ian Narev was making when, in announcing the bank’s $9.45 billion profit for the year to June, he explained why the bank hadn’t passed the entirety of the RBA’s 25 basis point rate cut earlier this month onto its home loan customers.

“Our entire reason for being is to balance between the interests of people who want to give us money to save it, people who want to borrow money from us and our shareholders who give us the capital we need to survive,” he said.

“Our job is to balance between the interests of those people. As a result of our decision (to pass on only 13 basis points to mortgages while lifting term deposit rates) we gave people a chance to earn more from their deposits, pay less for their home loans and we gave our shareholders the best chance of keeping a strong dividend.

“That’s how you balance interests, that’s how you stimulate an economy.’’

The forgotten class within the central banks’ fixation with lowering borrowing costs are savers. They have been punished. There is an equity issue that flows from the unconventional monetary policies.

Lower income households tend to hold their savings in cash and term deposits. Wealthier households tend to have greater exposures to financial and property assets. The effect of ultra-low rates has been to decimate the income from deposits while inflating the value of financial assets and property.

CBA said that of its 11.3 million customers with deposits, 75 per cent of them are aged over 55. For those who are retired, very low rates means a loss of income that many of them can’t offset by taking on more risk — the only adjustment they can make is to their spending and standard of living.

While the politicians continue to berate and threaten the banks because they didn’t pass on the full 25 basis points to home loan customers, it is worth noting that while CBA has 11.3 million deposit customers it has only 1.9 million home loan customers.

The 13 basis points that it did pass through to its standard variable rate home loans deliver them a benefit of $403 a year — on top of the multiples of that amount that they have already received as the cash rate has steadily tracked down from its pre-crisis level of 7.25 per cent to its current 1.5 per cent.

A CBA depositor with a three-year term deposit will get increased interest income of $575 a year, a recovery of a fraction of what they’ve lost in income since the crisis.

The decision that CBA and its major bank peers — and the smaller banks — took to pass on only some of the RBA cut may have been driven by their own funding requirements but it produced a fairer outcome and one that is probably better for the economy.

Those living off their savings may be more inclined to spend the extra income, whereas the post-crisis experience says that those with mortgages generally just pay their mortgage down faster.

The funding piece of the distribution of the rate cut — the increase in term deposit rates and some retention of the RBA cut for shareholders — is important.

Banks are required by their regulators to increasingly fund themselves with stable deposits and longer term wholesale funds. CBA is 66 per cent deposit-funded and it needs to retain and attract deposits if it is to meet the new post-crisis requirements.

Banks are also being directed to hold more core capital. Last year the major Australian banks raised more than $20 billion of new equity in response to an Australian Prudential Regulation Authority decision to impose a floor under mortgage risk-weightings. That capital doesn’t support new lending, but rather their existing balance sheets and therefore depresses returns on capital.

To maintain their appeal to investors and access to capital, the banks — largely owned by Australian superannuation funds and individual investors — have to offer attractive dividends.

CBA, which says it has more than 800,000 Australian households with about $100 billion of their savings directly invested in the bank, maintained its dividend. The average retail shareholder, it said, would receive $3738 this year. Millions of other Australians, of course, are exposed to the banks through their super funds. In CBA’s case, $6 billion of its $7 billion of dividends flows to Australian shareholders.

The major banks have finally started to defend and explain their response to the RBA rate cut in terms that are accessible. ANZ’s Shayne Elliott also described its decision as one that balanced the interest of depositors and borrowers.

The government, Labor and the Greens continue to lambast the banks for not cutting their mortgages rates by the full 25 basis points (although Bill Shorten hasn’t targeted the industry fund-owned ME Bank, which passed on only 10 basis points to mortgages).

It is worth noting therefore, that Glenn Stevens said the RBA had anticipated that the banks wouldn’t pass on the full amount of the rate cut to mortgages. He also said it was likely they would pass on even less of any future rate cuts as rates got lower.

The RBA staff is in regular contact with the banks. It is aware of how the banks will respond to movements in official rates.

It understands that the combination of falling interest rates and rising regulatory requirements reduces their profitability by squeezing their net interest margins, reduces their ability to generate organic capital and ultimately reduces their capacity to lend.

We’ve seen how potentially destabilising and destructive that cycle has become in Europe, where monetary policy is now in completely unconventional territory, including negative rates but appears to be having little, if any, effect in terms of generating meaningful economic growth.

Glenn Stevens said in his speech that the “return to normal’’ of global monetary policies looked like being a very, very slow process and that normal “is a different place now’’.

Whatever the new normal looks like, and whenever it emerges, it is likely that there will some unpleasant experiences between now and then, given the risk settings that the unconventional monetary policies have established.

Continuing to take from those with savings to reward those with debt, however, isn’t, one suspects, a sensible formula for achieving some sort of a return to respectable levels of sustainable growth, not just because of its impact on spending but because it does steadily undermine the profitability and eventually the stability of banks.

The Australian banks, big and small, may have apportioned the benefit of the latest rate cut between borrowers, depositors and shareholders because of the necessity of meeting the more stringent regulations for capital and funding.

That has, however, produced a fairer outcome between those who lend the banks their money and those who borrow it. Hopefully we’ll see more of the same in future if the RBA continues to push rates down.

Add your comment to this story

To join the conversation, please Don't have an account? Register

Join the conversation, you are commenting as Logout

Original URL: https://www.theaustralian.com.au/business/opinion/stephen-bartholomeusz/the-cost-of-punishing-savers-with-lowrates-policy/news-story/e2dd8d1389b4acdb99df125409c24e36