If the soft landing scenario plays out as forecast by both the Reserve Bank and the Treasury, the initial lifting of interest rates will level off after working relatively quickly to bring inflation back down into the 2 per cent to 3 per cent target band in 2023.
‘Whatever it takes’ is the way to go
Ahead of next month’s Jobs and Skills Summit, this underlines why Treasurer Jim Chalmers should unambiguously back RBA Governor Philip Lowe’s “whatever it takes” commitment to returning inflation to target promptly, including the need for wage restraint.
Dr Chalmers should heed what Australia’s biggest bank and largest mortgage lender is indicating about getting on top of inflation quickly being in the best interests of indebted households, and rejecting out of hand the “inflation doesn’t matter” school of thought being promoted by the Australian Council of Trade Unions policy paper published on Tuesday.
The wacky thinking latched onto henceforth by the ACTU is a recipe for entrenching high inflation, and higher interest rates, reducing the flexibility of the economy, undermining living standards and throwing away the one achievement of the pandemic, the lower than 4 per cent jobless rate .
The strength and profitability of Australia’s well-capitalised and generally well-regulated banks is a national asset for a commodity-exporting economy exposed to global volatility. The banks’ strength, built mainly on the rock of their property loan books, is also a barometer of Australia’s frontier growth economy that, in normal times, draws in people from around the world to live, work, and buy a home.
CBA’s stellar results coincide with the stepping down of chairman Catherine Livingstone, who oversaw its exit from bancassurance and return to bread-and-butter banking after the Hayne royal commission.
The big four – CBA, National Australia Bank, ANZ, and Westpac – benefit from dominant market positions. The tide of cheap money running out that’s hitting tech stock valuations will probably also moderate the threat that fintech innovators pose to the traditional banks. The competitive challenge may now come from big tech behaviors such as Google and Meta.
CBA is also bearing the downside of digital diversification and the collapse in the buy now, pay later sector, as the value of its $100 million investment in 2 per cent of Klarna plummets.
Yet the intensification of competition for home loan market share has crimped CBA’s net lending margins. It is also driving ANZ’s bid to become a bigger and better competitor by taking over Suncorp Bank.
Lending margins – the difference between funding costs and interest charged to borrowers – tend to shrink and expand as interest rates fall and rise. The banks will now need to manage the large number of borrowers moving off fixed mortgage rates to variable rates pegged to the higher cash rate. Commercial pressures could also assist with this transition as the banks compete on refinancing terms to retain and win market share.
Australia’s banks remain far from perfect. Their business models are all similarly leveraged to a housing market that has been overinflated by too much cheap money and budget stimulus. But given its overall strength, the banking system appears reasonably positioned to withstand the interest rate correction without a crash landing.