So much for central bank “independence”

After putting up with months of political pressure from the Rudd government, the Reserve Bank finally caved in, as evidenced by their attempt to bully the private banks into “passing on” any cuts in the cash rate. This should remove any misconception that the central bank is above politics and focuses only upon controlling inflation. No doubt the board had been reading the opinion pages of the newspapers.

Once the RBA and Labor Party teamed up to demand lower interest rates, private banks began to lose their spine. First, it was the National Australia Bank. Then came the ANZ. Who will be next?

10 thoughts on “So much for central bank “independence”

  1. I’m not entirely sure the banks have caved, and that it really isn’t a simple business decision. Borrowing demand has basically fallen off a cliff recently.

    I think bank executives may be fearful of the government but they’re most fearful of the shareholders. You don’t meet target and you’re stock is down 30% these days.

    I just think they’re trying to lend and make some money.

  2. And your problem is?

    If you haven’t noticed the central bank are worried about an economic slowdown and inflation. For the reduction of interest rates to have any hope of working it has to be passed on.

  3. First, there aren’t any interest rate rises to pass on yet. It’s not guaranteed there will be.

    But assuming there is, the CEO of the Commonwealth Bank made his position clear the other day when he said: “I don’t think we live in a communist country. We will do what is commercially appropriate and what is prudent. I don’t know of any legislation that says the Reserve Bank actually sets interest rates for commercial operations in this country.”

    I don’t believe the banks have caved in at all. If the ANZ and NAB thought it was bad for business to cut variable rates by 0.25%, there’s no way they’d do it. They are merely jostling for advantage in a market in which differentiation is very difficult. There are some borrowers dumb enough to fall for that piffle. That’s who they’re after.

    My only concern is that such jaw-boning might generate enough momentum for the government to intervene in the market. That would really cause hardship.

  4. “If you haven’t noticed the central bank are worried about an economic slowdown and inflation.”

    The fact that they’re considering targeting a lower overnight rate shows that they’re not concerned about inflation anymore.

    “For the reduction of interest rates to have any hope of working it has to be passed on.”

    A central bank manipulating the price of money through open market operations is the problem, not the capitalist actions of the major banks.

  5. “Wayne Swan has warned the banks that the Government would consider further changes to competition regulation if they failed to lower mortgage rates in line with the Reserve Bank’s rates”.

    Hopefully the Banks have enough balls to make their own decisions and not be influenced by the empty words of ignorant politicians.
    But it is a little worrying to see the treasurer making threats like above. As Swan notes, it’s the politicians that make the rules.

  6. A central bank manipulating the price of money through open market operations is the problem, not the capitalist actions of the major banks.

    Interest is the price of credit. You pay interest in order to receive credit. The price of money is goods and services. You trade your labour or goods to get money. Money and credit are not the same things. This is not generally a big deal but it is best to be clear when you are discussing monetary policy.

    Of course open market operations do manipulate both the price of credit and the price of money. The two are not independent variables.

  7. Thanks Terje. I originally wrote ‘advanced money’ and simplified it to just ‘money’ strangely forgetting that there’s an existing word for ‘advanced money’ being, of course, ‘credit’. As you point out, central bank manipulation of the price of credit does affect the value of the rest of the money in the system too (as well as causing other problems.)

  8. Greego,

    At the risk of boring those here that already know too well my opinion on these matters let me outline my view.

    The moment any government takes it apon itself to produce the nations currency they begin a process of monetary manipulation (or rather they continue the process at a new level). All fiat currency systems are manipulated. However some forms of fiat manipulation are more sympathetic to commerce and economic prosperity than others. Some fiat currency systems whilst not being a free market solution are more benign than other fiat currency systems.

    The primary function of a nations currency that matters to businesses and consumers is its role as a unit of account. Contracts are measured and struck using this unit of measure and any unanticipated shift in real value over time represents a betrayal of intentions and compromises the trust that given sectors of the economy place in eachother. Trust is a key element of commerical agreements. Obviously this issue is not overly relevant to spot contracts but most business engages in many long term contracts be they office or factory rental agreements or salary contracts.

    I don’t raise the issue of trust flippantly. We need only look at periods of high inflation to see a general breakdown in trust between sectors of the economy. Trade unions go on more strikes. The media fills with stories of foreigners trying to harm domestic interests. Customers resent the perceived pricing power of shops. Politicians as a class prosper on the division and radical ideologies that demonise certain groups within society more readily gain popularity. Listen to the vibe in any time or place where high inflation is prevalant and the pattern is much the same (although clearly the final resolution varies).

    The best fiat systems fixes the value of currency. The gold standard fixed the value of the governments currency relative to the value of the commodity gold. The current monetary regime in Australia seeks to fix the value of the currency relative to a basket of consumer goods called the CPI. Both approaches have the merit of focusing on fixing the value of the currency against a benchmark. I think targeting commodities is better than targeting consumer goods but I think it is first important to acknowledge that both approaches share this fundamental trait. And of course any system that fixes the value of a currency relative to some foreign currency (as the Saudis or Danish do for example) is also in the same class. All are ways to stabilise the value of the domestic currency by some means of fixing value. And you can’t fix the value of a fiat currency without some system of manipulation via some mechanism such as open market operations and an associated policy.

    Whilst I think that the government should stay out of the currency production business I also think that manipulation of the unit of account is essentially unavoidable with anything besides the most miniscule government. So long as the manipulation is going to happen it is better to focus on which manipulation works best rather than lament the manipulation.

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