November rate moves – almost an even money bet

Amidst all the shock and horror concerning the RBA’s surprise rate increase on Melbourne Cup day (and the attendant hysteria when CBA subsequently chimed in with a 0.45% increase in its home loan rate), it’s worth reflecting that over the last 20 years the RBA has changed rates in November almost as many times as they’ve left them alone.  In nine years out of the 21 they’ve changed rates in November (six of these have been rate hikes), including the last 5 consecutive years.  In fact, the last time the RBA left rates alone on Melbourne Cup day Makybe Diva was still showing the competition a clean pair of heels (2005).

Looking at the data, it’s fairly clear that November and December are the prime season for rate changes, presumably owing to the proximity of Christmas and the immediate impact on spending.  Contrast June – one rate move in the last 21 years (a hike to 4.75% in June ‘02).  What’s that all about?  Do they hibernate in winter?  There’s been more activity in January, and the RBA stopped meeting in January donkey’s years ago.

Rates-defiant CBA boss Ralph Norris takes swing at populism

Sir Ralph has come out swinging to defend CBA’s decision to follow the RBA’s Melbourne Cup Day 0.25% rate hike with a 0.45% rate hike of their own.  Not exactly surprising given that they’ve been banging on about their cost of funds rising 2bp every month, but the hostility to the reaction has certainly been surprising.  The other lenders all appear to be ducking for cover, letting the CBA wear all the flak, as normally the majors would have all announced their rate move by the Friday following the RBA meeting.

Ralph’s position is covered in the Oz here.  He also gets some help from former CBA head-honcho and current Future Fund chairman David Murray, who went on to make the following observation:

As to the suggestion that major bank profits - about $22 billion for the 2010 financial year - were too big, the Future Fund chairman said the banks needed to make a 15 per cent return on equity to fund the expansion of the economy.

One of the things I’ve never been able to figure out about banking is why they need to make a 15% post-tax ROE (or in the good old days, 20% plus) when the risk free rate was 5% or 6% (and that’s pre-tax).  I’ve pondered this before (see Keynes Mark II and Banks’ ROE), and I’d have to say that Murray’s comments don’t really shed much light in the matter.