Does Westpac’s Decision Mean the RBA Will Cut Rates?

Yesterday, Westpac [ASX:WBC] announced a $3.5 billion capital raising and a 20 basis point increase on some of its mortgage products.

The knee jerk reaction from analysts is that this will allow the RBA to cut rates at its November meeting. In interest rate obsessed Australia, seemingly everything calls for a rate cut. That’s because we’re completely dependent on continuing asset price rises to keep our heads above water on household debt of more than $1.8 trillion.

But just think about the logic of it for a moment.

Westpac announced the increase in mortgage rates to help maintain its profit margins. Foreign funding costs, which in most cases accounts for around 40% of the big banks’ funding needs, has increased recently. This means that as banks roll over their debt from a few years ago, they do so at a higher cost, which hurts their profits.

Westpac is simply trying to offset this rise in costs. If the RBA turns around and cuts rates immediately, all it’s doing is asking savers to subsidise the banks’ profits.

Of course, that’s pretty much the whole point of interest rate cuts, but to do so in such a blatant and immediate fashion would put the RBA at the centre of the banking cartel’s operations.

Hang on…

Let me rephrase that.

It would make it plain to see for anyone with a brain that the RBA really does act on behalf of the banks and not the Australian people. So far, it’s managed to convince everyone that it is truly independent.

So I’m not getting too carried away with all this November interest rate cut talk. The RBA doesn’t want to blow its cover. Look for one in December instead.

The other point to consider is that the RBA’s chief weapon against a slowing economy is not interest rates. It’s acknowledged on a few occasions over the past few years that lower interest rates are not the answer.

As a result, it’s turned into Australia’s chief economic cheerleader. If only, the RBA says, we don’t succumb to pessimism. If only we can see the economy through beer soaked, rose coloured glasses, we’d be much better off.

Let’s see how that strategy goes…

Because while people try to get happy, reality just rolls on over the top.

And the reality is that we’ve loaded ourselves up to the neck with massive debt levels to speculate on housing. As a result, we’ve created an economic structure built around services to housing and asset speculation in general.

When the bubble bursts, we’ll be left with a completely inflexible economic structure. It won’t be able to adjust quickly enough and Australia will more than likely suffer a deep recession as it purges the excesses of the bubble years.

The RBA will attempt to avoid this reckoning by cutting rates further. But this will undermine the confidence they’re trying to create and spook foreign investors. Wholesale borrowing costs for the banks will increase.

The out of cycle interest rate rise you just saw from Westpac will become more common. At some point in this sorry saga, the RBA will lose control of the cost of credit and we’ll be at the mercy of our foreign creditors.

No wonder gold priced in Aussie dollars is only $200 an ounce off its all time highs. In the years ahead, it will climb much higher.

Regards,

Greg Canavan,

Editor, Markets and Money

Join Markets and Money on Google+


Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

 


Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money