20 May 2024
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Don't worry, a banker says you can cope with a few more rate rises!

Peter Switzer
7 November 2023

Westpac’s CEO Peter King tells interest rate worriers and those finding it hard to make ends meet, as well as make those home loan repayments, not to worry. King says he knows they can handle another one or two rate rises. This bank CEO will handle it as well, in fact, better than those borrowers, because rate rises are good for his bank’s bottom line.

That said, it’s nice to know that on his assessment, his borrowers will be able to make it as rates rise, but it’s little comfort to those really stretched to hear a banker say he knows they can make it.

It’s comments like these that explain this chart of Westpac’s share price, which isn’t great reading for Mr. King’s shareholders.

 

Westpac

Over five years, the stock has tumbled from $30 to $21.92, while CBA has gone from $68 to $100, and Macquarie has jumped from $123 to $161. These are two banks you can bank on as a shareholder and you can thank the leaders at these operations for their share price rises, that coincidentally have undoubtedly helped a lot of super fund members, who invest in Aussie banks.

But let’s get back to Mr. King and the expected rate rise, which I think one day will be seen as the rise we didn’t have to have.

To be fair, this is what Westpac’s CEO said to the AFR: “I’m not saying it won’t be painless…it will hurt consumer spending and probably affect business more than what we are seeing. But I think that the mortgage customer has been very resilient to date.”

King might have sympathy for your small economic picture, but he is excited about the big demand for infrastructure, energy transition and more housing. And he likes immigration that will pump up the economy. Unfortunately, this will probably keep inflation higher for longer, which will then keep interest rates higher for longer.

Interestingly, one Westpac revelation that explains why 12 rate rises haven’t bitten as hard as we once might have thought is that two-thirds of Mr King’s home loan customers “…are ahead on their mortgage repayments, and offset balances rose to $57 billion at the end of September, as more customers opted for variable rate loans”.

The problem for the RBA and its interest rate policy is that some borrowers are smarter than they used to be and have a buffer built up in their loans and have offset accounts, which means rate rises don’t hurt like they used to.

This revelation could push RBA Governor Michele Bullock to hit us with another rate rise today, but along with others, I think it could be a mistake. Yesterday I revealed who was opposed to a rate rise. My list included NAB’s chief economist Alan Oster, the SMH’s economics editor Ross Gittins and AMP’s chief economist Shane Oliver. And the likes of Terry McCrann at News has also been telling us for weeks that Ms. Bullock won’t raise today.

It will take guts for the Governor to say “No” to a rise. She might think she has to show that she’s not scared to upset Treasurer Dr Jim Chalmers, who has ‘hinted’ a rise isn’t necessary.

Against that, Ms. Bullock is a well-trained economist and has been at the RBA for decades, so she should understand this economy better than most. But she must also remember most of her predecessors were well-qualified too but made terrible mistakes with interest rates.

Bernie Fraser with Paull Keating took home loan interest rates over 17% and we ended up in recession. Glenn Stevens raised interest rates in 2008 just before the GFC, after the stock market started crashing in late 2007. Some years later he kept rates too high for too long, which I kept bagging him about on my Sky Business TV program called Switzer.

Then of course Dr Phil Lowe made his terrible “no rate rise until 2024” mistake. Then he hit us with 12 rate rises in just over a year.

The one guy who made less mistakes in Michele’s time at the RBA was Ian Macfarlane, who ran the bank between 1996 and 2006, though I once received a phone call from his Deputy Governor, Stephen Grenville, when I criticised Ian for going to China on what looked like an unnecessary trip when the economy was screaming out for a rate cut!

Mr Grenville assured me that the trip was important, which I relayed to my interest rate hit readers in The Australian, who I’m sure were happy to hear that the RBA boss had his priorities right!

So that’s the history that Michele Bullock has lived with. I really hope she turns out to be an exceptional RBA leader, who shows herself to be an interest rate expert. This is a good goal to have when the only real weapon the RBA has is interest rates.

Good luck Guv. I hope you get it right.

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