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Friday, April 13, 2012
My analysis of why ANZ would lift rates 5pb to 7.5bp--before they did
A final curveball is what the banks do with their margins. We have ANZ’s decision on Friday this week.
If I was the CEO of a major bank I would definitely bump up lending rates by a good 5.0 to 7.5 basis points.
Why? First, because you will boost your net interest margins in an environment in which profits are going to be hard to come by due to structurally low credit growth – funding costs have been falling since January.
A second reason to widen margins is to amplify pressure on the RBA to neutralise that change in lending rates in May.
All else being equal banks do better in low interest rate climates. Asset prices rise, credit growth accelerates and impairments decline.
So the banks will want to see the RBA cutting in May and bumping up margins in April will increase the probability of that happening. Borrowers are still better off because the RBA ordinarily moves in 25 basis point increments.
A final reason to expand margins is simply because, as an oligopolist, you can!
From a margin extraction point of view the banks need to break the back of the purported link between the RBA’s target cash rate and actual, economy-wide lending rates.
While the link will always exist in practice (ie, notwithstanding what people may want you to believe), the banks should rationally want to improve their ability to freely profit maximize without annoying politicians and commentators interfering with their decision-making processes, as has been the case of late.