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If rates rise, bank bashing will go mad

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by Peter Switzer

Newspapers are telling us an interest rate rise is a possibility come Friday when ANZ releases its independent view on rates. And there’s a belief that if one bank rises then all will follow.

I don’t believe it. I don’t think Mike Smith of the ANZ could be that dumb. If he leads the charge to increase rates when the country’s embattled households and businesses are still struggling with high interest rates and a high dollar, and as unemployment is likely to sneak higher, then he will experience a backlash that could cost him more than he saves by pushing up rates.

Remember 80 per cent of the nation’s top economists expected a 0.25 per cent rate cut and the thinking was that 0.15 per cent would, in all likelihood, be passed on to borrowers.

As Terry McCrann from News Ltd newspapers told me on my SWITZER program on Sky News Business channel, a public outcry was expected if the RBA cut by 0.25 per cent and the banks offered anything less!

So, to raise rates would be a double kick in the guts that households would find insufferable, and it would be Prime Minister Julia Gillard and Treasurer Wayne Swan who would lead the bank bashing mob against the Big Four banks and the media would go along for the ride.

Funding costs up, profits down

Don’t get me wrong, I know banks are experiencing a spike in funding costs and profits will be falling from the unbelievable highs we have seen in recent years. And lower profits mean lower share prices and unhappy shareholders, but the banks have to manage their long-term relationships with customers as well.

The irony is that the RBA welched on the rate cut because the European outlook is getting better but it should also mean that the costs of our banks borrowing overseas could fall in coming months.

While I think the Reserve Bank should have cut to help push up business and consumer confidence, as well as taking the pressure off the dollar, at least they could easily cut by 0.5 per cent if things get worse in Europe. I don’t expect this to happen but we’re living through some crazy times and we’re still waiting on our Greek buddies to face their day of fiscal reckoning.

One more cut

My view remains that we will see at least one more rate cut here this year — that will do — and the banks would be off with the pixies if they believe they can raise interest rates right now.

One deliciously devilish thought I had was, if Mike Smith shows the rocks of Russell Crowe in Gladiator and raises rates when a cut is expected, I look forward to the time when the RBA raises rates but because of cheap money overseas, Mike actually cuts rates! Now, I would love to see that but don’t expect I will.

Finally, on Wall Street, the Dow rose 33.07 points, or 0.26 per cent, to 12,878.2 while the S&P 500 gained 2.72 points, or 0.2 per cent, to 1347.05.

The finish reflects optimism about Europe and could mean that borrowing costs for banks might fall this year. Let’s hope so.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Watch more from Peter on SWITZER TV.

Published on: Wednesday, February 08, 2012

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