Lowering the RBA rate is no longer going to do what traditional economic theory expects, and Philip Lowe knows it.
In fact, he’s shouting it (as best he knows how) at ScoMo & Frydenberg.
But ScoMo has the latest noise-cancelling headphones on, with the volume turned up to the latest Christian Rock song, singing “everything’s gonna be alright!”.
Pretty much the only thing lower interest rates are doing now, is driving households to borrow more money to spend more on a house, driving household debt to income levels higher (particularly when wage growth is so low).
But it’s not helping businesses to the extent it should – because the banks are reticent to lend on deals that they should, because they’ve become excessively risk averse.
Cheaper money won’t encourage businesses to borrow more.
They already want to borrow. They just can’t!
Businesses are instead going to non-traditional lenders, willing to pay often significantly higher interest rates to be able to actually access capital.
What lower rates are doing though, is driving more investors – particularly the funds of our ageing population who tend towards cash-style low-risk investments – towards fund managers that invest that money in debt (i.e. they are non-bank lenders).
As a perfect example, one large non-bank lender who pays retail depositors about 5%pa for their term deposits, recently told us that they’ve grown their book from $3 billion to $9b in the last 2 years, as waves of investment capital flow in looking for a safe home that pays a reasonable return.
Simple economics of supply & demand are therefore putting downward pressure on non-bank lending rates, as an increasing number of fund managers are awash with cash that they need to get out the door.
So non-banks will probably keep getting bigger (unless we see a GFC repeat of disappearing trust in investment managers).
For borrowers, this should continue to improve pricing, as well as gearing and terms.
We’re already seeing some very large international-backed non-bank lenders starting to provide funding at rates not that much higher than banks. Logic should say that this will start to drip down to smaller lenders.
It seems that the RBA’s hammer is increasingly being faced with more and more screws.
Unfortunately it seems that whilst Parliament House is full of tools, some of them incredibly complex and expensive. But none of them seem to be a screwdriver.