RBA to Banks: Credit drives the Aussie economy
It was only yesterday I pointed out that the Reserve Bank of Australia would cut rates soon.
And then this morning, the governor of the RBA, Phillip Lowe, went and proved me right.
Obviously, he wasn’t explicit.
Central bankers never are.
They prattle on with fancy economic terms almost no one understands.
However, this speech was different.
This time, Lowe pointed out exactly the direction the Reserve Bank is heading.
Being on the right side of history
Just as we pen pushers were switching off last night and going home, Phillip Lowe donned a suit and headed off to give a speech in Melbourne.
Ah, the work of a central banker is never done.
This speech was different from his others, though.
Last night focused on how the financial system needs to rebuild the trust of the consumer.
Lowe called out the banks for their bad behaviour.
Going as far as to suggest there needs to be an overhaul of top brass salaries and banking culture.
Although I’m highly dubious of his intentions.
Banks have been behaving badly since the end of the financial crisis.
Let’s be frank.
The rampant ‘upsell’ bank growth plan could’ve been mentioned even a couple of years ago.
Instead, everyone in banking power – APRA, the RBA, the banks and our own government – allowed the Aussie banks to lend with reckless abandon and ignore the consequences of credit-fuelled growth.
Calling out decade-old banking culture right now – on the back of the royal banking commission – reeks of Lowe trying to be on the right side of history rather than genuine intent.
The sudden attention to banking misconduct is nothing more than a desperate attempt to right the wrongs, even though they watched these ‘wrongs’ unravel on their watch.
But there was more to the speech than an empty plea to restore trust in the banks.
Lowe touched on two points that I believe confirm my theory there’s a rate cut coming over the next 18 months.
Lowe proved he had his finger on the pulse of the market.
He said he was concerned that an increase in consumer spending was not as high as the increase in wages.
Of course, he didn’t explicitly explain why he was concerned. So I will break it down for you.
People are spending more money, but the extra spending isn’t coming from higher wages.
There are only two places people are drawing the extra funds from: savings or taking on more debt.
Total personal credit is growing at 4.6% year on year. And the savings rate in Australia has dropped from 2% to 1% this year.
So, yes. Spending is up. But it’s being funded by dipping into savings and more debt.
That’s why it’s a concern.
Because it’s unsustainable without wage growth. At some point, the savings will dry up and the people will reach maximum debt.
But the real insight in Lowe’s thoughts was the importance of ‘credit’ to the economy.
Australia needs debt to keep going
The most important takeaway last night was found in these two sentences:
‘Banks need to take risk and manage that risk well. If they become afraid to lend simply because of the consequences of making a loan that goes bad, our economy will suffer. So a balance needs to be struck here.’
Well, lo and behold.
That’s a central banker’s plea to keep lending.
And a frightening admission about the role of debt in the Australian economy.
The governor of the RBA has essentially asked the government to not overregulate the banks on the back of the royal banking commission.
Lowe is imploring banks to take risks and accept that some loans won’t be paid back. Which is funny, because banks already operate on the theory that some loans will go bad.
The thing is, though, our own top central banker is standing in a room full of very important banking people, reminding them they need to keep lending.
Because if they don’t, Australia’s economic growth may fall.
Or worse, disrupt the economic driver of increasing wealth in Australia, which is rising house prices.
So really, I suspect Lowe means banks need to keep the credit available for property.
Make no mistake about it.
Aussie banks may be in the headlines for all their misdeeds.
APRA may look like they are tackling the problem by imposing caps on high-risk lending.
Heck, even the banks are blustering, telling us they are going to tackle their greedy banking mindset.
But when the feel-good PR exercise is over, APRA will turn a blind eye once again.
And the banks will return to reckless lending once more.
Oh, but in order to do all that, they’ll need the okay from the RBA.
And that will come in the form of a rate cut.
Because remember, credit is an important driver of the Aussie economy.