The rollercoaster ride of interest rates in Australia illustrates how the general environment can have a major impact on business activities; but it also raises ethical questions. When Australian official rates were lowered several times during the global financial crisis (GFC), none of the big four banks passed on the full extent of the rate cuts. Yet every time rates have been increased in the past, all four banks have very quickly passed on the full extent of the mark‐up to their mortgage holders (and they have sometimes even increased rates despite no official increase from the Reserve Bank of Australia). Their primary focus appears to be increased share price.

By 2015 the RBA had lowered the official interest rate to a record low of 2 per cent due to apprehension about the impact on the Australian economy of lessening demand for resources from China. However, the best variable mortgage rate on offer from the big four banks was 4.53 per cent, a mark‐up of 2.53 per cent. A former second‐in‐command of the Bank of Melbourne stated that a fair margin for lending was between 1.5 and 2.0 per cent. While not passing on rate cuts in full against a background of record profits is not illegal, it is questionable on moral grounds. Moreover, despite the RBA leaving the official cash rate unchanged at 2 per cent, the big four banks unilaterally increased their mortgage rates in October 2015 by a minimum of 0.15 basis points (CBA, 0.15; NAB, 0.17; ANZ, 0.18; Westpac, 0.20).

What compounds the problem is that homeowners who hold big mortgages are scared of the RBA increasing the official cash rate, or banks not passing on cuts in full. As a result, many homeowners with mortgages are putting every spare cent into paying off their loans as soon as possible. Even when interest rates are lowered almost no one reduces the amount they pay off on their mortgage each month. Shane Wright, Economics Editor of The West Australian, wrote that ‘most commercial lenders have reported Australians sticking with repayments struck when interest rates were higher, refusing to reduce their monthly payments in line with interest rates’. Gail Kelly, former CEO of Westpac, said that customers were more likely to make additional debt repayments or put the money into savings than help stimulate a sluggish economy by spending. Customers are spending less at retail outlets these days and many shoppers now make their smaller retail purchases online due to convenience and cheaper prices. This compounds to drive retailers to the wall, and one wonders whether the banks won’t eventually get caught in a series of bad loans to their small business customers. 

Had the Commonwealth Bank of Australia (CBA) not been privatised in the 1990s, it would have passed on rates cuts in full, and, consequently, the other banks would have had to follow suit. This raises questions about ethical considerations in privatisation, and the more recent privatisation of companies such as Qantas, Telstra and Medibank further highlight the issue.

QUESTION

Do you think privatisation of the CBA, Telstra, Qantas and Medibank has been good for the Australian economy and for consumers? Provide reasons for your answer.

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SAST FUR INTEREST RATES