Australian banks accused of choking the economy

Despite the fact that the Reserve Bank of Australia decided to leave base rates unchanged earlier this week it has been confirmed that Westpac Banking and Australia and New Zealand Banking Group have both decided to increase their mortgage rates. This goes against the policy of the Reserve Bank of Australia which had earlier this week indicated that the economy was stronger than many had assumed.

Are consumers being fleeced?

While the very fact that commercial bank base rates are going in the totally opposite direction to the rates set by the Reserve Bank of Australia would appear to indicate banks were “fleecing” customers, but this may not be the case.

Banks have been claiming for some time that the cost of finance has been rising due to difficulties outside of Australia and many had already indicated they would be moving their own interest rate cycles in a different manner to that of the Reserve Bank of Australia. These comments by the likes of Westpac Banking and Australia New Zealand Banking were initially ignored by the wider media as more and more people began to concentrate upon the future decisions of the Reserve Bank of Australia.

Is the cost of living in Australia rising?

Due to the fact that mortgages make up a significant element of the general cost of living across the developed world it seems almost inevitable that the increase in mortgage rates by Westpac Banking and Australia New Zealand Banking will increase the cost of living for many Australians. Not only will it increase the cost of mortgage payments but it will also leave less income to cover other areas of the cost of living which continue to rise.

The Reserve Bank of Australia was placed in a very difficult situation earlier this week with many economists automatically assuming it would reduce base rates to help the economy as a whole. However, it would appear that the Australian economy is far stronger than many had assumed and a reduction in base rates may well have fuelled inflation, fuelled consumer and business borrowing and led to further problems down the line. In the short to medium term the decision to maintain base rates at their current level leaves the Reserve Bank of Australia with more power in the future should the economy take a downward spiral.

Why is the cost of borrowing set to rise in Australia?

The main reason that mortgage rates are set to rise in the short to medium term, according to Westpac Banking and Australia New Zealand Banking, is the fact that international lending rates on the commercial markets continue to move higher. While the Australian base rate remains unchanged we have seen credit lines being squeezed around the world which has led to a general increase in the cost of borrowing for commercial operations such as banks.

This is most certainly impacted by the ongoing problems with the European banking system and various European economies which are struggling to balance their budgets. If there is a credit squeeze within the European banking system this will have an impact upon the worldwide banking system and lenders will withdraw credit lines or ask for premium interest rates for their funds.

Does the Australian government have any influence?

The truth is that, as many governments around the world have found, the banking system is very much the tail that wags the dog of worldwide governments. Despite the fact that governments make regulations and laws as they see fit, the truth is that if the Australian government for example wants the banking sector to improve credit lines and improve interest rates then they will need to play their part. Whether this would mean a reduction in base rates by the Reserve Bank of Australia, in order to loosen the noose around local credit markets, is open to debate but the banking system certainly has a very different agenda at this moment in time to the Australian government.

Struggling in the boom times!

While it would be perhaps a little over the top to suggest that the Australian economy is in boomtime, in relative terms it is experiencing significantly stronger growth than the vast majority of developed countries around the world. However, through no fault of the Australian government, the Australian banking system, Australian consumers or Australian businesses it seems inevitable that borrowing costs across-the-board will increase in the short term. This will have an impact upon not only spending patterns but also sentiment.

If consumer sentiment and business sentiment in relation to borrowing and spending was to turn downwards this would have a dramatic impact upon the outlook for the Australian economy in the short to medium term. There is an obvious impact in relation to increased mortgage rates with regards to the housing market although this may well have a knock-on effect to other areas of everyday life – consumers would reduce their spending, businesses would look to cut costs and unemployment would rise…… consumers would reduce their spending, businesses would look to cut costs, etc, etc.

Is Europe dragging down the rest of the world?

While the first leg of the potential double-dip recession across the world began in United States of America there is no doubt that the second leg is firmly rooted in Europe. While many economists had already expressed their concerns and fears about the euro currency they were dismissed as incorrect, misinformed and downright anti-Europe. In many ways chickens are now coming home to roost with the suggestion that the Greek economy, which is still in turmoil, is just the tip of the iceberg in relation to European economic problems.

A tightening of the credit lines in Europe will impact upon the worldwide markets which are now more entwined than ever before. This will lead to increased borrowing costs across-the-board and countries such as Australia which have managed their economies far better than the vast majority of European governments will pay a hefty price.

Conclusion

On the surface it looks as though the banking industry in Australia is very much at odds with the government and the Reserve Bank of Australia, but this is not necessarily the case. Borrowing costs on the international credit markets have moved significantly higher over the last few months and for many people in the banking industry the decision by the Reserve Bank of Australia to maintain base rates at their current level was a precursor to increased mortgage rates.