Australian Financial Review
The chief executive of Westpac’s institutional banking division has questioned the need for further RBA rate cuts given the “economy and a banking system that is far from crisis”.
Speaking at an Australian Business Economists event in Sydney on Wednesday, Westpac Institutional Bank CEO Lyn Cobley said lower rates and the more unconventional monetary policies recently canvassed by the Reserve Bank were unnecessary and would do little to encourage businesses to borrow and invest.
RBA governor Philip Lowe downplayed the chances of quantitative easing (QE) in Parliamentary testimony on August 9. Dr Lowe did, however, say that the bank had examined the experience of unconventional measures overseas and what might be suitable for Australia, including asset purchases and negative rates.
“Globally, if all central banks go to zero, then we’d have to consider that as well,” Dr Lowe told the Parliamentary committee in Canberra.
Ms Cobley was group treasurer at Commonwealth Bank of Australia during the global financial crisis of 2008, an experience she described as “at times truly frightening”. Major offshore markets were reluctant to fund Australian banks amid an intensely fearful environment.
“We had investors lose faith in banks all around the world. It was very clear that extraordinary [monetary policy] measures were required,” Ms Cobley said.
“Having had this experience I find it somewhat extraordinary that we are standing here talking about unconventional monetary policy at a time when I observe an economy and a banking system that is far from crisis.
“The economy’s growing, there is low unemployment, there is low inflation that is close to the [RBA’s] target range.
“The problem we are seeking to solve is how we create an environment where consumers are confident to spend and businesses want to invest again.”
Ms Cobley described how the day before she had asked a group of 87 of her most senior institutional bankers whether a further drop in rates would encourage their corporate and government customers to borrow more to invest.
“The resounding answer? No. Rates are already at record low levels,” she said.
“I was in Perth seeing the CEOs of some of the major mining companies over there and they are doing very well. They are investing in renewable projects for their iron ore mines; new lithium and battery projects are being done.
“What they are most worried about is not the rate of borrowing. They are worried about the adverse impact of the global trade war and the fact that Australia may well end up being collateral damage.”
Ms Cobley said that while developments overseas were out of policymakers’ control, there was more that government could do to foster growth and activity without relying more heavily on already extended monetary policy.
“I’m with Governor Lowe in believing that monetary policy won’t solve this but that we need broader economic reform. We have a productivity problem in this country, and we should be dealing with it.”
The RBA cut in June and July, bringing the official cash rate target to 1 per cent.
Minutes released on Tuesday of the bank’s last board meeting suggested the deteriorating global environment would factor into further rate cuts. Futures markets expect the RBA to cut twice more by February of next year.
“As rates continue to drop, so do our margins and it could be precipitous,” Ms Cobley said. “We worry about the impact on our profitability and therefore the impact on our rating.”
The European Central Bank in 2014 pushed rates below zero, and as such it was “little wonder that the European banking system has been so precarious for so long”.
Article appeared in The Australian Financial Review on 22 August 2019.
Article written by Patrick Commins.