There is a suggestion that the RBA is going to provide cheap loans to banks.
The Reserve Bank of Australia (RBA) is Australia’s central bank. One of its biggest roles is to decide Australia’s interest rate, taking into account economic conditions including unemployment, inflation and the housing market. The RBA interest rate has a ripple effect across the whole economy.
Will The RBA Give Banks Cheap Loans?
The Australian Treasury has suggested that the RBA could provide cheap debt finance to banks either by buying their bonds or through direct lending according to reporting by the Australian Financial Review.
The AFR managed to get this revelation through a ‘Freedom of Information’ request even though the advice had been ‘protected’.
Keeping rates a bit higher than 0% is important because some entities need to keep some of their investments as cash, like superannuation funds, life insurers and annuity businesses. They need to earn a return from that cash.
If the RBA runs out of room to cut interest rates and the government didn’t spend, the central bank could buy bank bonds and residential mortgage backed securities to lower the borrowing costs for households and business. Which sounds like it’s going to indirectly be taxpayers buying more bank issues to provide borrowers with low interest rates.
But the Treasury was mainly suggesting the loans be used for productive investments like non-mortgage business lending.
However, the Treasury made reference to the potential that low interest lending could lead to excessive growth of asset & house prices and make it very difficult to revert lending rates back to normal.
Are Banks A Buy On This News?
In the short term it might help the banks’ maintain profitability but in the longer term it might be a bad thing that rates are able to go lower for borrowers. I’m not confident that it wouldn’t lead to further fuel on the house price fire.
Governments and central banks just don’t seem to want to accept that growth is this low because of plenty of other conditions, perhaps because of the low rates. Compared to the banks, I’d much rather buy the reliable shares revealed in the free report below which are much less exposed to the bizarre world of current interest rates.
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