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Banking Bias: Westpac's Profit Surge Raises Eyebrows Amid RBA's Preference for Banks over Households

Tuesday, 07 November 2023 05:40 Sport

"Banking on Profit: Westpac's Soaring Annual Gains Prompt Concerns Amid RBA's Interest Rate Strategy"

The recent revelation of Westpac's annual profit reaching $7.2 billion for 2022-23, a significant 26% surge from the previous year, raises eyebrows against the backdrop of increasing mortgage rates for millions of Australian families. The fact that this financial success occurred while many households were still benefiting from low-rate fixed mortgages, only now expiring, adds a layer of concern.

Anticipations are rife that the coming year might see an even more favorable financial climate for Westpac and other major banks, potentially setting new profit records after a prolonged period of subdued interest rates and relatively modest profits. The massive profit announcement, however, shouldn't catch the Reserve Bank of Australia (RBA) off guard.

In June of the same year, the RBA published a discussion paper examining the impact of interest rates on bank profitability. The paper acknowledged a widespread empirical link between lower interest rates and a decline in banks' net interest margins. While the RBA downplayed this finding, suggesting that banks might find ways to maintain profitability in a low-interest environment, the reality for ordinary households lies in the margin between returns on savings and the costs of borrowing.

The intricate relationship between interest rates, bank profits, and the well-being of borrowers comes to the forefront. While it's evident that higher interest rates benefit banks, they pose challenges for borrowers. The RBA's commitment to an inflation-targeting regime, based on the concept of the Non-Accelerating Inflation Rate of Unemployment (Nairu), adds complexity to the situation. The Nairu, considered the unemployment rate consistent with low and stable inflation, is critiqued for its shortcomings as a measure of full employment.

The concern emerges from the realization that the RBA's approach, aligned with inflation targeting, might favor the financial sector over households facing the brunt of interest rate hikes. The delicate balance between economic stability, inflation targets, and the well-being of the general population becomes a focal point of scrutiny as Westpac's soaring profits underscore the potential disparities in the impact of monetary policies.

"The Inflation Targeting Paradox: RBA's Pursuit of Prestige and Power at the Expense of Workers"

The Non-Accelerating Inflation Rate of Unemployment (Nairu)-based inflation targeting regime, championed by central banks, has become a cornerstone in shaping economic policies. However, this system, while enhancing the authority of central banks and the financial sector, has also played a role in pushing down the wage share of national income over the past three decades.

The conflict between the Reserve Bank of Australia's (RBA) interests and the principles of effective economic management comes to the forefront in the quest for a swift return to the 2-3% inflation range. This target, originally adopted by the Reserve Bank of New Zealand in the 1990s, was a political compromise rather than a product of robust economic analysis. The 2-3% range, now a global norm, was chosen during the era when New Zealand was perceived as a success story in neoliberal reform.

The recent push for a rapid return to this inflation range raises questions about its viability. Critics argue that this target, conceived before the era of zero interest rates post the global financial crisis, was pitched too low. Renowned economists, including Olivier Blanchard and Paul Krugman, have advocated for a 4% inflation target, suggesting it would provide more leeway for interest rate policies to stimulate the economy without hitting the zero lower bound.

In a recent review of the RBA, the question of adjusting the inflation target was raised. However, the response, echoed by RBA supporters in the media, focused on preserving the bank's "credibility." The paradox lies in the fact that while a more credible central bank is desirable, the potential sacrifice to maintain this credibility may prioritize institutional interests over the well-being of households facing increased mortgage rates and workers at risk of job loss.

As the pursuit of prestige and power becomes entangled with economic policies, the RBA's commitment to the 2-3% inflation range raises broader questions about whose interests take precedence in the intricate dance between central bank credibility and the socio-economic impact on households and workers.

"As the RBA Board Meets: Unraveling the Consequences of Rapid Rate Hikes and the Ongoing Surge in Westpac's Profits"

Whether the Reserve Bank of Australia (RBA) opts for another rate hike in their upcoming board meeting or not, the repercussions of the rapid increases already implemented are set to reverberate through the economic system. The fleeting era of near-full employment that has recently graced us may come to an end, particularly if the RBA achieves its objectives. Concurrently, there's a high likelihood that Westpac's profits will persist on an upward trajectory.

The dynamic landscape of economic policies and rate adjustments raises critical questions about the trade-offs between monetary decisions, employment stability, and the financial sector's prosperity. As we navigate this intricate terrain, it becomes apparent that the RBA's moves are instrumental not only in shaping the economic climate but also in influencing the corporate landscape, as evidenced by the continued ascent of Westpac's profits.

John Quiggin, a professor at the University of Queensland's School of Economics, offers insights into this multifaceted scenario. His expertise adds depth to the ongoing discourse about the potential consequences of central bank decisions and their broader impact on employment trends and corporate financial successes. The outcome of the RBA board meeting holds implications beyond the realm of interest rates, marking a pivotal moment in the delicate balance between economic growth and financial stability.

In conclusion, the impending decisions of the Reserve Bank of Australia (RBA) hold far-reaching implications for the economic landscape, extending beyond the immediate context of interest rate adjustments. Whether the RBA opts for another rate hike or not, the ripples of the rapid increases already implemented are poised to navigate through the economic system, potentially marking the conclusion of a brief period of near-full employment.

The delicate interplay between monetary policies, employment stability, and the financial sector's prosperity underscores the complexity of the situation. As the RBA seeks to achieve its objectives, questions arise regarding the potential trade-offs between economic growth and the profits of financial entities, exemplified by the anticipated continuation of Westpac's upward trajectory in profits.

John Quiggin's expertise, as a professor at the University of Queensland's School of Economics, enriches the ongoing discourse about these multifaceted dynamics. His insights provide a nuanced perspective on the intricate relationship between central bank decisions, employment trends, and corporate financial successes. The forthcoming RBA board meeting emerges as a pivotal moment, shaping the trajectory of the economy and influencing the delicate equilibrium between growth and stability in both the financial and labor markets.

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