They were the daze my friends…

Andrew Pegler – 21 January 2011

Sorry folks, the pre-GFC halcyon days of low interest rates are gonski.

Wayne and crew may be getting on their high horse and making it easy to transfer your business between banks, but they won’t have a significant effect on the cost of borrowing.

Cost of borrowing? Our banks have to pay interest rates on the money THEY borrow, from the big banks overseas. Yep, just like us, our banks borrow too. That’s because our collective deposits are never enough to cover our collective demand for loans. To this end our banks will borrow $130 billion over the next year.

Pre-GFC, non-banks like Rams borrowed cheaply on global markets and undercut the major banks. They cashed in on the tides of fantasy money sloshing about the global financial system and, in turn, so did we. That tide has since gone out.

To quote ABC’s Stephen Long, “It was a time built on a lie and the cost of the money to banks was underpriced and wasn’t sustainable”.

The disappearance of this cheap money means higher lending rates. It also means less competition in our banking sector because non-bank lenders can’t undercut the big boys, and errr… they ain’t around anymore anyway. Additionally, overseas borrowing is now more expensive for our banks, as per the laws of supply and demand, thanks to the various bailouts in Europe, which have soaked up a lot of money.

On the subject of interest rates, HSBC economist Paul Bloxham reckons they’ll rise soon. Interest rates will be a weapon of choice for bludgeoning down the inflation stoked by flood-inspired rising food prices. And with an economy close to full employment, expenditure on reconstruction and repair will push up wages, further increasing inflation.

BTW, I am sticking with my prediction: the cash rate will end the year at around. 5.5%.