The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Friday, March 23, 2012

RBA's Debelle destroys argument that RBA cash rate does not determine bank funding costs

In another good speech yesterday, the RBA's Guy Debelle absolutely demolished the notion that the RBA's cash rate does not determine bank funding costs and therefore bank lending rates, as many have claimed (and I had rejected). The very first point Debelle makes is:

The level of the cash rate set by the Reserve Bank is a primary determinant of the level of intermediaries' funding costs (and hence the level of lending rates). However, there are other significant influences on intermediaries' funding costs, such as risk premia and competitive pressures, which are not directly affected by the cash rate...

Let me start with the first point. The cash rate set by the Reserve Bank Board is the short-term interest rate benchmark that anchors the broader interest rate structure for the domestic financial system. It is the front end of the risk-free yield curve off which other financial assets are generally priced. When the cash rate is adjusted up or down, the whole structure of interest rates in the economy moves up and down, with the effect most direct at shorter maturities.