NAB’s Little Anzac Surprise

This story features NATIONAL AUSTRALIA BANK LIMITED, and other companies. For more info SHARE ANALYSIS: NAB

By Greg Peel

Curiouser and curiouser. Why did National Australia Bank ((NAB)) chose the Anzac Day public holiday to announce it had increased its standard variable mortgage rate by 10 basis points to 9.46%? Is it so the inevitable barrage of media calls would be avoided? Would we all be too tired and emotional to notice? Or did ANZ’s ((ANZ)) hike the day before catch NAB off guard?

It matters not. While it took a long time for the big banks to make their first RBA-independent hikes after the credit crunch sent funding costs spiralling, the incremental changes have flowed rather freely ever since. With not a lot of change in the level of the benchmark Libor rate since its peak in August, banks have little option. To hold out with fingers crossed has proven futile.

TD Securities notes that with ANZ’s and NAB’s hikes in place, 90% of Australian mortgage holders are now paying 9.4-9.5% against a cash rate of 7.25%. There has been a near 1% increase in mortgage rates since Christmas. With household debt running at 160%, and the household debt servicing burden being at a record level (by a huge margin), it’s no surprise consumer sentiment has plummeted. This should serve to put the break on spending and, over time, inflation.

This is exactly what the RBA is counting on, but with oil and food prices failing to play ball consumer inflation will take a long time to get from the first quarter level of 4.2% (which the RBA will be hoping is a peak) to under 3% – the point at which the RBA can put on the slippers, kick back and enjoy a brandy and a pipe. It could be well into 2009 and maybe even 2010 before this goal is reached.

However, the chances of the RBA increasing the cash rate once more next week is diminished with the independent bank lending rate increases. The RBA is attempting to slow the economy to reduce inflation, and higher rates to consumers is part of the plan. TD Securities suspects we will now see two consecutive quarters of negative real retail spending growth, which is effectively a consumer recession. TD’s senior economist Stephen “Kooky” Koukoulas believes the effect of these interest rate hikes could see the economy “stop”.

Certainly it was noticeable that while everything over which consumers have little control soared in price last quarter, one area of “discretion” – clothing & footwear – went 2.4% the other way. That new frock will just have to wait and those old runners are probably good for another few spins around the block. Then there’s everything from rethinking restaurant meals and movie tickets to putting up with the clunky old fridge for a while yet. The Nintendo Wii idea can go right down the toilet.

Kooky suggests there is still a possibility the impact on the consumer will translate into a RBA rate cut by the end of the year, although he’s getting a bit lonely in that position. The last PPI/CPI data had many an economist abandoning that view.

We do know that treasurer Wayne Swan’s first budget is expected to be a painful one, featuring much cost cutting and possible hits to the hip pocket. However, there’s nothing the Rudd government can do about the promised tax cuts which could single-handedly keep inflation alive in the second half. It all comes down to what Australia does with the money. If it goes onto the mortgage or the credit card, or into the bank, then we’ll be right. If that Wii gets another look, then we could still be in trouble. Unfortunately Australians’ recent track record as astute budgeters is not a good one.

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