Eighty Percent of Respondents are Morons
Firstly, on an ignorant note, we saw a poll in the Herald Sun here in Melbourne this week. A poll that made a swift and brutal deletion from the sum total of human intelligence.
Something like eighty per cent of respondents voted that Australian banks should be banned from raising interest rates outside the RBA’s adjustment. Splutter.
The graph below shows the market interest rate (blue), versus the RBA’s target cash rate (pink) that you hear so much about.
Sorry, the graph didn't copy.
Banks raise funds on the open market. The open market in that graph is the blue line. Their funding costs depend more on the 90-day bill rate than the RBA’s cash rate.
So when a bank raises interest rates…it’s doing that because it’s concerned about higher market costs. Not because the RBA has raised rates. Forcing a bank to copy the RBA’s rate movement is a bit like forcing Grant Hackett to swim in the slow lane. He doesn’t belong there. And banks deserve the freedom to foul up their own business on the free market.
Something even more interesting you can take from that graph…the RBA’s interest rate movements actually follow the short-term market interest rate. At a distance too. The market rate always moves before the cash rate does.
Do we need a central bank? The one we have at the moment doesn’t do much…instead it lets commercial banks do the dirty work. Market rates go up. So do banks’ funding costs. They raise mortgage rates. The RBA plays a round of golf.
And when the RBA does raise or cut rates, its goal is to curb inflation by reducing demand. Yet the type of inflation we have now is only really linked to supply. Not enough oil. Not enough rice. Not enough aluminium.
We need a central bank like we need a fly-kick to the head.